Comment by startingup | Hacker News Reader

Comment by startingup | Hacker News Reader

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I would like to believe Paul's thesis, but in the back of my mind, why do I get the feeling "He is trying to scare investors into putting money"?!

Seriously, I think over-supply of start-ups will crash prices. Yes, there is no limit to wealth creation, but even so, it is easy to upper-bound wealth creation over, say, the next 5 years. We can say with confidence there won't be more than, say, $10 billion worth of web start-up acquisitions over the next 5 years (in total, not per year) - that was about the total in the last 5 I would estimate and I think I am being fairly optimistic here. Even that $10 billion would be parceled out in the 80-20 rule - a couple of YouTube home runs, a few singles and doubles, and the remaining mass of start-ups have to fight over a fairly small pot of gold.

My objection is consistent with economic theory: over-supply leads to serious price crashes, even when you make the favorable assumption (which is not exactly true in the start-up case) that in the long run, the over-supply can be absorbed.

Why are you focusing on acquisitions? There are profitable companies that remain private, like 37signals (plus ones you never hear about because there's no point in talking about how much money you make) and also IPO, which is rare but potentially huge. Google alone is worth $86B, at that IPO was only 4 years ago, so your "$10B in the past 5 years" number is clearly incomplete.

If your thesis is correct, then these are really the ones that need focusing on. If the world is about to be be bombarded with startups, they can't all be bought or go to IPO.

The remaining startups will need to find a middle ground of some sort.

I don't think there's any limit to the number that could get bought. The upside that founders are willing to trade in exchange for safety is an opportunity that would call acquirers into being if they didn't already exist.

And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history.

"And why couldn't there be 100 or 1000 times as many public companies? Stranger things have happened in history."

They would need to be smaller or the economy would need to be bigger. Ties in with your other essay.

There could be 100 times as many U.S. public companies while Sarbanes-Oxley remains in effect?

Obviously not, but that wasn't the point.

Sarbanes-Oxley is probably not going to be repealed or significantly reformed, so was the point purely theoretical?

It's a mistake to view political barriers as insurmountable. It's practically impossible to repeal the legislation, but maybe someone will open another liquid market for equities through some weird loophole. And remember that we are talking about social change in a timeframe of decades here. There is no telling what could happen.

Efficiency and reason tend to win in the end. There is much to be gained by having less bureaucracy and red tape for public companies, assuming that they are public companies of a different type than what they are today.

Private companies can issue dividends too - it's what we plan on doing if we're fortunate enough to get that far (1). M&A is for suckers (2) and IPOs aren't worth the trouble anymore unless you desperately need liquidity (e.g. Google) or you're not profitable.

1 - Assuming the capital gains tax remains similar to what it is currently.

2 - http://is.gd/2Fla

http://news.ycombinator.com/item?id=304790

If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town.

And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?

Why would you want later stage investors to drop out? You have early, cheap equity; don't later stage investors reset the valuation and give you a shot at cashing out if you want? (I really don't know, I'm actually asking).

The valuation goes up between us and a series A round, but in a successful startup it should go up much more afterward.

How many companies that get a series A round end up being successful? It seems like having that opportunity to decide if you agree that the company will keep growing or that you've made enough and would rather reinvest in the next round of startups would be nice to have.

It wouldn't be nice to the startups to do that, because it would send an alarming signal to the series A investors that would drive down the valuation and maybe even prevent the round from closing.

"If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town."

But isn't the entire YC experience designed to get angels and VCs at demo day to make an investment in each company?

No, the main focus is on whatever the startup is building. Toward the end of each YC cycle we switch to talking about how to pitch to investors. But even there the way to be convincing is to be working on something genuinely great, and just tell the truth about it.

Is it not the case that like a VC, a seed-stage investor maximizes his income when the startup he funds tries to hit a home-run? And are not home-runs much more likely if a VC invests in the startup?

Home-runs are more likely if VCs invest, but it is hard to say whether this is because VCs select the companies most likely to be big successes, or because their participation makes companies big successes. So it is very hard to predict what would happen if startups stopped taking VC.

If everyone woke up tomorrow and started working twice as hard, what would limit their output?

demand and supply, as always

it is trivial for some hypothetical foobar corp to spit out twice as many widgets as they do now. but why would they? without viable demand, they indeed show a loss for their effort-spurt. as you heard the CEO of ford say today, oversupply was a major problem for the automakers. working twice as hard will kill you if you don't have twice the demand

the better question is how currency growth can be employed to stimulate demand over a period of time. growth comes from healthy inflation (3-5%). inflation is always a monetary phenomenon. this is why you will often hear opponents of "secured" currencies (gold etc) tell you that you can't get growth in an economy in the mid term unless you have a fiat currency.

What limits demand for cars is that people can't afford them, not that they don't want them. But since by my assumption everyone is working twice as hard, including the buyers, there should be demand to match the supply.

"What limits demand for cars is that people can't afford them, not that they don't want them."

Or that they already have them? In the U.S., isn't the ratio of eligible driving population to drivable autos approaching 1? So, twice as many cars would likely not find buyers and drive down prices a lot.

Sorry if I'm missing the bigger picture stuck on this specific detail.

Maybe try the idea that everyone works twice as hard, but instead of building twice as much stuff, everyone just builds the same products better.

(Of course, if you think about this carefully enough, the distinction between "more" stuff and "better" stuff falls apart.)

no, the demand does not manifest itself spontaneously. people just don't decide to wake up and work twice as hard, there has to be legit economic growth. there is a monetary role. its no coincidence that "healthy" economic growth conforms to healthy monetary growth. this directly addresses your point of people wanting cars but not being able to afford them. this demand could be trivially induced artificially by monetary means, but it would lead to unhealthy inflation

monetary cycles typically manifest over an eighteen month period. i.e. the increase or decrease in Fed policy would impact demand directly likely no less than a year. the only way to dramatically alter this...i.e. to actually get people to wake up and work twice as hard takes drastic currency action.

this is all undergrad economics

If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is), then one would expect just the opposite of what you assume: more wealth should be created this way in the next 5 years than in the previous 5, because more value will be. And the productivity delta between startups and large companies will grow even faster, since the latter will be increasingly starved for new talent.

Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.

If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is)

no there isn't. come back in five years, the top ten internet companies will control 95% of all traffic and 99% of all revenues. this market has almost zero friction...how is it that google has already sewn up over 80% of ad revenues on the web? where are all the mom-and-pop ad networks? they're on deaths door

by the same token anyone can build a PC...so what happened to the 10,000 little PC makers that used to be in every strip mall? today we have basically three pc makers....hp, dell, apple. so much for "low barrier to entry = high res"

I don't get this argument. Assign the top ten companies as high a percentage of whatever as you like: it won't prevent people from seizing opportunity to create value at a higher rate than large organizations are able to do. The point is that the two barriers that largely prevented talented people from doing so in the past - cost of entry and cultural beliefs - don't hold sway anymore.

The fact that some markets have matured and been commoditized hardly implies that there is no new value to be created.

The problem is, "low cost of entry" is just another way of saying "commoditization". Your argument depends on the assumption that because it's cheaper to produce a website than (say) a motherboard, it's therefore going to be easier to create a valuable website. That's wrong.

Ultimately, there's no strategic advantage to be gained by entering an industry where the barrier to entry is so low that everyone can do it. When you're competitor N+1 in a market like that, your only hope is to compete on efficiency (i.e. the Dell model), or novelty (i.e. the Apple model). Otherwise, you're just a guy in a strip mall, selling beige boxes; you might make a living from it, but you're not going to get rich.

In short, don't think of the PC industry -- think of the teriyaki restaurant industry. It's cheap to open a teriyaki joint, and anyone can do it, but unless you're going to serve gourmet teriyaki, or find a way to produce it for less (/shudder/), it's not the place that you want to be as an aspiring entrepreneur.

You guys are comparing a single saturated market to the economy as a whole. That's a category error. New markets are always emerging.

No I'm not -- my comments are limited to saturated markets.

Obviously, one of the ways to get rich is to create a new market and exploit it. But that's probably not as easy as building the better Teriyaki restaurant, judging by how rarely lucrative new markets emerge.

Low cost of entry means anyone can try any number of ideas with minimal investment. Commoditization means all of those ideas will be the same, thereby lowering the value of the idea.

They are not the same thing.

Gee, after reading some of your comments, I almost feel like giving up on and going off to live in the woods.

The woods are peaceful, and have a way of changing your perspective. I recommend them.

(Seriously: I am not a pessimist, but compared to some of the wild-eyed optimism that gets thrown around here, I may sometimes seem like one. My world view is that, given a choice, you should live life in a way that maximizes health, happiness and satisfaction, not money. Start a company because you want to work for yourself, not because you want to get rich -- because you probably won't.

If your whole goal when starting a project is to achieve fame and fortune, you will go through life in an almost perpetual state of disappointment. If, instead, you make choices that allow you to live a good life now, you'll be happier by definition.)

There might be a limit, but it's much bigger than $10B in 5 years. Just in 2007, I counted up $29B of publicly announced web startup acquisitions. That easily justifies thousands of startups trying for a piece of that pie.

A good list (including more than web) is at http://startup.partnerup.com/2008/01/02/2007-acquisitions-we...

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