The 'Startup Boom' is a disguised jobs fair for big corporations
zdnet.com
zdnet.com
But of course, it's the owners of the arena, the big corporations who make the real money. Not necessarily from the gladiators themselves, but from the fight. The startup scene is a testing ground, a lab, for Big Corp. It tells them which way the market is going, it tests risky territory. And if something seems to work, Big Corp. snatches it right up. If in the past big research divisions had to test new ground, all on the company's dime, now startups are voluntary crash-test dummies, shooting for a big prize.
And the economics are simple: if the king wants to find a big treasure buried somewhere in the woods he could pay a thousand villagers $1000 each to look for it, or he could offer $0.5M to the one who finds it and let the villagers volunteer for the job. He gets the same work done at half the cost, one villager turns rich and inspires the poor masses, getting a lot of love and attention, while the king still gets to keep the treasure while giving the villagers a fake hope of changing their fate. Simple, really.
So the dirty big secret is this: the startup scene isn't a job recruiter for the big companies, but a way to get workers for free. It's a far worse form of exploitation.
Sorry for all the metaphors.
Of course, I'm not sure it's a terrible thing. Nobody actually dies, at worst a few years of hard fighting are expended before a "real job" is acquired. The hard, risky fighting, while exhausting, isn't a bad thing for the young.
I think if anyone is getting screwed, it's the inexperienced "business co-founders," who don't have a high hourly rate to fall back on and fall hard for the emotional myth. They still have the resume item of "Founder" that appeals to future employers looking for initiative, but their unfocused skill-set might hurt them.
However, it's interesting that it's self-imposed harm for inexperienced business types, because I imagine that no one is actively exploiting them. Why would they?
That's why most "startup guys and girls" work and scrimp and suffer and sleep under their desks for a minority share in nothing, while VCs (the business types) laugh all the way to the bank.
Because taking outside capital is like forking over your hand of cards AND promising to only play tiddlywinks in the future.
Whoever holds the money, holds the power. Unless the other party wakes up to realize that they don't need the money.
The fact is that for the past decade (and getting better all the time), it costs virtually nothing to start a profitable web-based business. Almost no one truly needs the money men at all. Tech types still think they do, though. They want the security & validation & ease of being handed a great big whack of cash. Which means they end up the person without power.
The amazing thing about developers, designers, teachers & writers is that we not only own the means of production, we carry them with us IN OUR HEADS. We walk around thinking we need to appease the factory owners so we can get to work, but we don't.
1) Many founders are attracted by glory rather than logic.
2) Large companies receive research information from startup successes and failures.
But I don't agree with the gladiator metaphor at all because it implies a degree of deviousness and collusion that isn't present in the startup sphere, and is disingenuous to imply.
Take your example of the king offering $0.5M for the finder of a treasure. Here you imply that his goal of offering the prize is to "give villagers a fake hope" and "inspire the poor".
What if the treasure in reality was just worth $0.6M to him? Then the king might conclude a) if someone had the treasure, he'd be happy to pay $0.5, but b) suppose the cost of finding the treasure via hire at $1M, then it is not worth hiring people to dig it up.
Thus, the king may not decide to hire people to dig this, while happily posting a prize. He doesn't need to have ulterior motives to do this.
Now let's take the economics further. Suppose some people are efficient and other people are not efficient diggers (they're good bakers), and there is no way to observe this beforehand. Then if he hires people to dig, the king will lose money because he's at half efficiency with half bakers and half diggers. If he posts a prize, the efficient diggers will self sort into digging, and the bakers will produce real good.
Our data points are few, and really just 1) and 2), so we can't know for sure companies are being evil (and I don't believe they are). It's a classic case of an underdetermined system.
You might enjoy my essay since we're obviously in agreement: http://unicornfree.com/2011/fuck-glory-startups-are-one-long...
That said, it totally makes sense for AmaGooBookSoft to pay at least some engineers amounts of money which historically were not awarded to technical employees. This should be priced into everyone's expectations, startup-affiliated or no.
Wait...what? You're cherry-picking the top 10% of startups (maybe the top 1%), and criticizing this guy for torturing math? For every one Dropbox, there are perhaps a handful of others that get aqui-hired, and dozens more that just fail silently. That's just basic VC economics. Maybe the bulk of the money gets transferred to the success stories, but that's little comfort to the hundreds of pretenders to the throne who don't go anywhere.
TeachStreet is a perfect example -- I met Schappell a startup breakfast in Seattle shortly after he launched the site. At that same breakfast were at least a dozen other startup founders. I've followed many of them since then, and nearly all have given up (in fact, one of those founders now works at TeachStreet). Schappell made it to acquisition by a company for which he used to be a director. There are usually reasons that these things happen.
It’s from among those ugly ducklings that the swans of the new age emerge: FB, Goog, Twitter, Yahoo! and others — no one wanted them at first — then they couldn’t get enough of them.
There is only so much handwaving that one can get away with. "Ugly ducklings" that "no one wanted"? You just can't pretend that existing companies didn't, e.g., know that Facebook was worth serious money, pretty quickly. They offered Zuckerberg real money for Facebook. According to a book quoted by this extremely-irritatingly-formatted article at Business Insider, the buyout offers started four months after Facebook started:
http://www.businessinsider.com/all-the-companies-that-ever-t...
And Dropbox? Everyone and his brother has dreamed of buying Dropbox. The most famous rumored suitor is Apple:
http://www.macrumors.com/2011/10/18/dropbox-indeed-balked-at...
The entrepreneur's perspective may be different.
If there's a long tail of Airbnbs that drives most of the expected profits generated by an investment strategy, then the status quo understanding of things--buy a bunch of lotto tickets, and make a bundle when one hits the jackpot--is probably an accurate representation of the market strategy.
If the median investor isn't going to make any money from getting a big hit, though, it's a different story. Most value is going to come from talent acquisitions. In which case, the article is right, and the incredible sea of funding available today is effectively a pooled set of resources by big corporations that are funneled to VCs in exchange for recruitment and building of effective teams. Which would make VCs the best-compensated HR managers in history.
There's also no reason both can't be true. Maybe the majority of profits are generated by Dropboxes, but the typical VC understands that those are lotto tickets and is relying mostly on the latter scenario.
Pretty much all of the M&A guys have a column in the table which lists $$/head.
The number is in the nosebleed sections of valuation lately, as near as I can tell. I doubt it will end well.
i.e "if you had never heard of the 1% of exceptions to your rule...".
Edit: basic 3rd grade grammar.
The difference between founders and investors is that founders care about more than just expected value. A founder with no assets other than his stock in the company will often prefer to sell now and lock in the current price rather than keep rolling the dice. So to the extent there is a difference between the motivations of founders and investors, it's exactly the opposite of the situation this writer describes.
EDIT:
I guess you could say that entrepreneurs and investors are all actually working for Google or IBM or whomever, trying to find the next big thing. They're just not getting a salary but working on a commission. And once in a while, some startup may get away, do an IPO and become a real force, but that's just like an agent on commission starting his own competing business. That's a risk any employer takes.
That's not true. VCs will only invest in a startup if they think it has a chance of an IPO. Angels prefer that sort of startup too, though they are not as rigid about it as VCs.
IPOs are unquestionably the "motor" of the VC business. That's what drives all their thinking.
Acquisitions are really about control and ownership: Control of IP, control of customer relationships, control of planning, ownership of growth potential. It's placing a bet that ownership is strategically beneficial. Sometimes there's a defensive component.
"We bought them for their talent" is the cover story. It maintains the secrecy of the real value the acquirer believes it sees. It sounds better too.
And we tech folk eat it up. It plays into our egos.
But think about it. Technical talent is actually fairly fungible above a certain competency level. You know you or a handful of your friends could build most products you see. It's the decisions about what to build, how to build it, when it got built, and how the market responded that are all bundled up in a company's existence at a point in time. It's this bundle that's being bought. Not talent.
And it's a lot easier to swat a fly after you bought it and locked it down with a vesting agreement. A fly that's running around free might require a chase.
Lots of acquisitions are to destroy or at least undermine a competitor, potential competitor, or other disruption.
Which is why the chest-thumping "change the world!!" "disrupt!!" "free yourself, you caged lion you!!" rhetoric around startups is so sad. The "logical" result is usually the destruction of the startup itself, and the yoking of the founders to an agreement which forces them to stay at a big company -- the company that destroyed or undermined their baby -- in a JOB (cage) for years to get their payoff.
Miserable.
Having met quite a lot of startup founders post-sale (on the conf circuit, in speakers' dinners and green rooms), I can say… I have never met one who was thrilled about the money, and mostly they have struck me as tired, sad, and defeated.
The first rule of selling your startup is don't act like are looking to sell your startup. If your startup has no chance of making any money, why would a big company pay you anything more than market salary to work for them? If you want to get paid a lot for your startup you have to be seriously invested in it for the long-term, or at least look like you are.
This guy has a point or two, but I wouldn't be taking engineer career advice from him.
Because, as TFA says, they don't buy your startup for its business potential, but for the proven engineering talent.
Do you know how ridiculously difficult it is to prove to an established business that "no, I don't have the specific experience you are looking for, but I can learn it in short order and I'll be one of your best employees," and then stand out from the 100 people behind you who say the exact same thing?
It's also ridiculously difficult for companies to figure out who the talented people actually are.
If you're really talented, what better way to prove it and lose nothing in the process? And what better way for a large company to get good people on board?
If you're a whole-hearted entrepreneur, then don't sell.
Otherwise, a startup is a great way to get some experience, prove your value, and get a great job afterward.
If the option to sell to a large company who wants talent didn't exist, the downside to startups would be significantly greater.
If you've raised an A round, the easiest place to get your B round is the original set of investors (not least because it can keep the number of board seats/turnover low). If the A round guys want an acquisition exit and you refuse, not only are you spiting your best option for B round funding, you now have to raise money in an environment when all the other VCs know you ignored the last round of VCs' desires. Good luck getting your B round in that scenario.
Entrepreneurs may not want to be part of a talent acquisition, but often VCs do. If you're determined to never work for a big corporation you don't own, you better bootstrap forever and never take VC cash.
You get a nice cash bonus (even if you only net $50k, it's nice), AND you come in higher in position than a random hire, and you have a shot at a better company than you might otherwise.
It would be crazy to try to raise VC to start a business to get a job somewhere as an acquihire, but bootstrapped is entirely different.
Sure buddy. A $25m payday means you have an 8% stake in a startup worth more than $300m. And as we all know, $300m+ acquisitions happen every day, right?
But hey, who needs to understand business or technology when you're a writer.
His point doesn't quite fit with his theory that everything's a big talent acquisition conspiracy, though, since those are usually much, much smaller. Unless that was your point?
They might be ahead but I don't think it's that easy.
Normal angels aren't investing in a uniform random manner, though, and I have to assume that that helps their odds. Lending their money and their name to the company can help the odds as well.
Heroku was founded in 2008, years before 500 Startups and many of the other incubators, so it didn't take that long. (YC was founded in 2005)
If I had $1mm to invest and got to put it into exactly the companies I wanted every year, I could probably get great returns, but for a random dentist from Oklahoma, he'd be better off just buying AAPL stock.
Being angry at Apple or Twitter for buying a company and shutting down their operations seems misplaced - why not be angry at the founders that agreed to do this?
The engineers have a route to distinguish themselves, they get well rewarded in the process, the big companies get the talent they want and society runs lots of experiments in the marketplace as a result.
Only only downside I can see is that a particular valuable service may get shut down, but at least the model has been proven and someone else in search of an idea could emulate it (think etherpad).
I question whether that is in part due to anti competitive agreements between Intel, Google etc.
If they can't poach each other's engineers, they must go somewhere else for talent. What better place than the most ambitious, intelligent group?
As anti-competitive and illegal as the anti-poaching agreements are, they contain an important insight: These companies need to grow the total pool of people working for them to keep growing the sector. At the macro-level, it is perfectly in Googles interest that Apple grows, and vice-verse.
In order to get such talent companies must offer large payouts to founders since the next source for talent is a highly fragmented group and there for hard to target.
Teachstreet was doing great until Google changed their algorithm last year. That apparently killed their traffic and so they started looking for a buyer since their main business was no longer viable. So yes, a talent acq, but not in the way that he suggests.
Lala's technology supposedly formed the basis for iTunes Match and iCloud. I personally think that there may have been a bidding war between Apple and Google (because IMO $85M was ridiculously high for LaLa) but that's just my own hypothesis. Regardless, not a talent acquisition.
Summify was a 'traditional' talent acq. of the type Twitter, FB, and Google have been doing of late. So he is one for three of the examples he chose to cite in his article.
And talent acquisitions alone aren't terrible either, at least for the founding team. They're never the home run investors hope for but they have been known to return a profit on "sunk costs" cash.
Really? I doubt that. I would imagine software engineers could be much more efficient without the drag of a large company
It means squat in some obscure little startup.
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This is not a bug. It's a feature.
Edit: I'd also say that a certain section of startups are in on the game too - how many startups can you recall where their sole raison d'être and exit strategy was to be acquired by Google, Facebook or Apple? The dropboxes and facebooks of the startup world are much more rare.
Back a dozen years ago (omg, has it really been that long now?), you'd IPO and use all that new money to hire people to take care of the actual business management for you. A founder could get back to hacking on new, fun stuff, or let his board bribe him to step down :-)
I don't think it's dirty either, since it helps big companies innovate.