"The End of Silicon Valley" Is Nonsense
blog.eladgil.com
blog.eladgil.com
Really liked that quote. One of the benefits silicon valley gets when it mints a few hundred or so millionaires is that those people now go out a bit more fearless.
Tom Lyon who is a serial entrepreneur once told me that you really needed three wins, the first was you joined a company that taught you about what being a tech company entailed, the second was a startup where you made enough out of it that you could do a third where you could better control the economics and the vision. There may be a number of attempts in that thread but its really true.
A number of people I know seem to have various milestones for fearlessness, but they roughly correlate to;
1) they own their house free and clear,
2) they have enough money set aside for their kids educations,
3) they have enough money set aside to keep them in Ramen indefinitely[1].
Each level brings its own level of fearlessness.
[1] generally the 'retirement' calculators ask you to predict when you're going to die. So you take that number, the cost of paying taxes/insurance on your house and your own health + ramen and that is your 'ramen retirement' number. Note that you leave behind a giant asset (the house) so many folks assume selling the house and moving to a smaller/cheaper place in that number.
Translation: In maths for SF
1) $1-2 million, minimum for a house for 4
2) $250K per kid x 2 = $500k, assuming public high school
3) Min $1 million per head, 50k pre tak 30-40k post tax
total: $3.5 million to $4.5 million, NAV ~= 5% pretax of $100m exit
Sorta-back-of-the-envelope
This is why you need N exits, not just 1
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need...
3) 500k per your note
2) 500k for two kids in university
1) 200k for house
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= 1.2 million after tax = 1.5 million pre tax
Try this: In 8 years, 80% of what we spend on the entire US Armed forces will be spent to pay rent on the National debt.[1] And, if we think about that, thats about $250K per 2 tax-payer household of assumed govt debt.[2]
Not trying to be a kill-joy. Just adding stuff up.
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[1] Per the latest budget, approx $800b vs $1000bn/yr
[2] 20bn/300 us pop x 50% tax base x 2 earners
The principles espoused on MMM applies everywhere in the world, you should really read into the math and the technique.
Sovereign debt is not normal debt, you can't look at it in such personal terms. Normal people can't just print money just to start.
But, the data show just historically, that even the cost to support the student in a university town, is also skyrocketing. 30k per kid x 4 is 120k just for living expenses, not tuition. So that is 240k for 2 kids and that is 2.2x your house cost.
Similalry, I understand economics. But with $20T outstanding, printing money things will happen. If interest rates double (and they are 1/2 of normal now), then that Interest amount is 1.6x the defense budget.
To think about that for a minute: The Banks, if they were acting as a group, could take 1/2 the debt service and finance an Army on the Scale of The USA (by far the largest on the planet). We would basically be renting the country from the banks at 2x what we pay to keep people from "stealing" if you will the country by force of violence.
These are some interesting juxtapositions.
Also, I'm not debating your $500k number at all. I'm just pointint out that for most people the goal is somewhere as per ChuckMc post. But the meath suggests things either are already more complicated that we think, or are going to get so at some stage.
Lastly - on the disruption of education. I think between the two of ur posts we are making the case why this may be heading in the direction you are proposing.
For example, even under the example you've provided (about 1/2 of the SF numbers), the large portion of university education is 1/3 of the total and 2.5x the house cost. That seems pretty un-realistic. But its the math.
Historically, data show even the cost to support the student in a university town, is also skyrocketing. ->30k per kid x 4 is 120k just for living expenses, not tuition. So that is 240k for 2 kids and that is 2.2x your house cost, if in any urban/metro etc. Even at state school like UC etc.
Similalry, I understand economics. But with $20T debt outstanding in 2020, even printing money things will happen. If interest rates double (and they are 1/2 of normal now), then that Interest debt service is 1.6x the defense budget.
To think about that for a minute: The Banks, if they were acting as a group, could take 1/2 the US debt service and finance an Army on the Scale of The US itself. We would basically be renting the country from the banks at 2x what we pay to keep people from "taking" the country by force of violence.
These are some interesting juxtapositions.
May be an entrepreneurial way to think about for those that are prone to being a cheap ass like me
Yes, some are only in mind-- including ability to overcome fear, in general
I am actually wondering if the Google Fiber initiative there will cause a startup boom.
SV has the money, it has the talent, it has the beautiful weather. Yeah the rent sucks, but that's the only downside I know.
Both Kansas and Missouri have a "Kansas City" and the two cities are adjacent to each other.
> Third, Google was founded while Sergey and Larry were studying at Stanford University, which I've stated in my other comments, is one of the most optimal places to start a company.... Nearby or on a college campus.
I think that Stanford is a unique and wonderful place, but there are lots of college campus' and a fair number of comparable schools, but only one SV.
Just look at New York, while it's honestly pretty much on par with SV in terms of cost of living, it's got a fantastic startup ecosystem in which many startups burn cash equally as fast.
Step outside the SV bubble, I'd venture to say that two thirds of the states within the continental US have fantastic and thriving startup communities with plenty of talent and venture funding to boot. You just have to know where to look.
As fellow nerds you should realize that with the power of the internet as well as the sheer amount of interconnectivity we now experience, there are virtually no location barriers.
I'm sure that's because money is so readily available in SV, but there's no actual reasons why startups can't be disruptive and still cash-positive early.
The main benefit of funding is actually social connections and social proof, not money, in my experience. (If anything, the money is a drawback, because it most cases it causes companies to do stupid things -- grow big when they haven't even figured out the product yet.)
If anything, I think the talent gap makes the pay difference seem small.
The cost of living gap isn't as huge as you'd think, either; especially for the childless (and let's be honest; Illegal or not, everyone discriminates against parents. Once you have kids, well, your job just isn't your highest priority anymore, and rightly so.) I mean, in the suburbs around sacramento, you get a reasonable single family home for the price of a silicon valley condo. Let's simplify and say you pay half as much for housing. But housing is a vanishingly small part of a nerd's budget, at least until kids come. Yeah, food, gas and stuff cost a little bit more... call it 10%? not a lot more. Cars, computers, non-real-estate capital goods and gadgets cost the same or are slightly cheaper in slicon valley.
I mean, yeah, when it comes time to have kids? you have a point. But for childless nerds? silicon valley looks pretty nice.
What you're arguing is empirically false. I know tons of startups in the valley that are founded by people who started elsewhere and moved here. Hardly any move back. Those that do have to because of our moronic visa system or move to Boston, Seattle, or New York.
They are almost all hiring, and they manage to find good people (not without a good amount of effort), if they can't afford offices they work out of their living rooms and that's just fine, they don't travel during rush hour so traffic is a non-issue, and if past performance is any indication of future results (which may not be true, is that what you're arguing?) they will make up a disproportionately large portion of the successful (in the admittedly uniquely SV sense) tech companies of the next few years.
While the spare bedroom of my apartment may not be many people's idea of a "better" work environment, we too offer much better problems to solve then that of other tech companies recruiting developers in our area as well as equity. Since we're such a small, close knit team, each of us certainly has the utmost potential to make giant impacts on a day to day basis, and that we do, but that's practically a given when talking about a startup.
> What you're arguing is empirically false. I know tons of startups in the valley that are founded by people who started elsewhere and moved here. Hardly any move back. Those that do have to because of our moronic visa system or move to Boston, Seattle, or New York.
I never said don't eventually migrate to the valley if it's where you feel your company needs to be to position itself for success. So long as you have the resources to be able to move your entire team and their families, as well as the capital to compete with other tech companies while recruiting - Go for it.
> They are almost all hiring
I'm sure they are, who wouldn't be when you have millions of dollars of other people money to throw around at your problems?
> they manage to find good people (not without a good amount of effort), if they can't afford offices they work out of their living rooms and that's just fine.
Touche, we have had no problems recruiting extremely talented individuals, even given the fact we hardly have any perks nor health/dental/pet benefits.
> they don't travel during rush hour so traffic is a non-issue
Sometimes there's no way of avoiding travel during peak times, so your solution just won't cut it.
> if past performance is any indication of future results (which may not be true, is that what you're arguing?) they will make up a disproportionately large portion of the successful (in the admittedly uniquely SV sense) tech companies of the next few years.
That's not what I'm arguing, overall what I'm stating is that geographic location matters very little depending on the market you're pursuing. Obviously a vast majority of the future successful startups will come from the valley strictly due to the amount of VC money being thrown around. However, don't discredit the amount of misinformation and bad advice being fed to founders, as this only further pollutes the thoughts of many to believe that Silicon Valley is the only place their company has a chance to succeed. They've got much better things to think about then what city they need to position themselves in to possibly increase their chances of success, like their product and the well being of their team.
And now we get to the primary reason why I'm willing to spend extra to live here. I mean, I haven't lived in Missouri in so long that I don't really know the state of things there. But I do know that being a nerd in rural California towns? Socially speaking, it's a matter of 'passing' - It's no fun. This is the cultural centre for my people.
This facebook bubble will blow over within the year; It comes, it goes, and from what I've seen, this merry-go-round is about out of juice. Come visit us after that and see what it's like when investors aren't throwing silly money after dumb ideas; after most of the suits go back to selling amway, and after the brogrammers decide to go back to school for their MBAs, it will once again be just us nerds.
Anyhow, really? I'd not worry about it too much. One of the primary advantages small companies have is that we can hire remote workers. And having remote workers gives you a staggeringly large pool to choose from (if you are good at picking people, you can get really good people for not all that much money.) it really is the best of both worlds; you get the 'low expected salary' of the midwest with the giant pool of applicants of the coastal population centres.
For me personally? living here is worth the added costs. Hell, I never really felt like an American until I moved here. Elsewhere in the country, I've always been 'the other' - and for me? I'm willing to pay rather a lot extra for that. That is true of a lot of technical people. I /do/ suggest visiting- maybe even while this bubble is still ongoing. It can be a lot of fun. But yeah, unless you are going for funding (and unless you are the sort of person that can only communicate face-to face) it's probably not a make-or break kind of thing.
All I wanted to point out was that on average, salaries are not as much higher here as you think. Salaries and expectations are both much higher, and that can even out in the end.
(Of course, small companies rely on finding the inefficiencies. The people that are good but underpaid. Small businesses have massive advantages over large companies when it comes to evaluating people and making trade-offs. On top of that, evaluating people is really difficult. Extremely difficult in the interview context, so lots of mistakes are made.)
I don't. But I couldn't compete with the salaries in Sacramento, either. Let's put it this way; I paid myself something like $40K last year (salary/profit whatever... I spent $40K on me last year)
Obviously, I'm unable to pay market rates for experienced/connected people.
Right after the .com crash it was easy. Even through the mid '00s, I was picking up people I knew personally that had worked with me during the dot-com that were now stuck making sandwiches. "I can't give you much of a raise, but I can give you a raise and work that counts as experience towards what you want to do."
Of course, that's harder now. My latest two contractors are one very raw recruit who is local, and one reasonably good person that is in the midwest and doesn't want to move.
I mean, you find someone that could be good, then you train them, then you give them maximum flexibility and hope they stick around for a while. Yeah, they move on, and that's okay... they then become the best resources for finding your next local raw recruit.
(for an example of 'maximum flexibility' I don't have any set hours; my employee shows up at the office maybe once a week, usually unplanned, and he often takes off on vacation with short notice. I mean, yeah, Facebook has 'pet insurance' and they probably tolerate you rolling in at eleven, but they expect you to be in the office most of the time.)
But yeah, you hire when the economy is shit, and you do what you can to hold on when the economy is gangbusters.
The thing is, the people you want (as customers, mentors, and employees) are thick on the ground here. Like I was saying, for the same skill? I don't even think you pay more here, because standards are just that much higher.
> What about commercial real estate? Even in Sacramento, it's just simply not feasible.
really? huh. The only reason I don't own a santa clara 'industrial condo' right now is that my credit is shit. (well, that and I don't have a whole heck of a lot to use as a down.) warehouse space here can be had in the $100-$200 per sqft range, and you look at layfayette near el camino (a not awesome part of santa clara, but still, part of santa clara) and you see nice big industrial condos starting at about $150K. You can rent in santa clara, 1000-2000sqft places for $0.50-$1.00 per sqft. (I'm talking essentially industrial units... but that's what I want.)
So yeah, uh, I guess I don't really see real-estate as a limiting factor. (I mean, yeah, if you want to be in mountain view, it's rather more expensive. But, I don't see why you would want to be in mountain view where you have to compete with google for real-estate when you can move to Santa Clara and have incredibly cheap power and incredibly cheap dark fiber provided by the city.)
Again, I think the key to understanding the economics is that while salaries are higher here, the standards for Engineer skill are proportionally higher as well.
With that said, not one of our team members have completed their degree, and I'd be willing to bet every one of our developers, myself included, are equally if not more skilled then anyone you'd potentially pit against us against from the valley. Our standards are equally as high, as we enjoy working with "A" people, and we don't tolerate anything less. We don't discriminate based on educational merits as they mean absolutely nothing to us, and that allows us to recruit individuals from all walks of life. Also, since we're so close to the University of Missouri (Mizzou) as well as St. Louis and Kansas City, we're able to pick up university educated graduates if we so desire (which so far, we haven't).
We work M-F out of the spare bedroom of my apartment from anytime after noon til early into the morning. Some of our team members live together, and some have families to support. (not to mention we all grew up in the Midwest, and our entire families live around the area) Since we're bootstrapping we're on a very tight budget, so needless to say real-estate is definitely a limiting factor for us, and California is expensive no matter where you choose to reside.
While I do agree that customers, mentors, and employees are abundant on the coast, I'd argue that our geographic location is a blessing. Not only is it superb for our market (Independent music), but the entrepreneurial community in Columbia Missouri is exceptionally strong, intimate and full of helpful mentors, networking events, competitions, and resources.
But yeah, the dot-com bubble had a tremendous effect on my life; if I waited four years to get a job, degree or no, it would have been many years before I would have been able to find proper employment. I was incredibly lucky in that I came of age just in time to leverage the low standards of the height of the dot-com boom. (I was then able to gain enough knowledge, experience and connections that I was able to continue working through the crash. I think I can take credit for making good use of the opportunity; but I wouldn't have had the opportunity if I tried to start doing the same thing in 2001 or 2002.)
California really is all about the boom and the bust. But this part of California, specifically, is interesting in it's cultural makeup. I can go to parties where I know one person, and I'll meet three customers. I sell a product targeting highly technical users, and I feel that it's reasonable to advertise in the local Safeway. (I'm not the only one that feels this way; recurrent, a company that refurbishes old Ciscos and other 'enterprise' kit advertises in another local Safeway. I don't know if they started doing it after I did it, or if I just didn't notice them until after I started doing it, but either way, it's not a crazy idea like it would be in Sacramento.)
There certainly are good technical people elsewhere in the world; I didn't mean to say that there aren't, though I can see how my comments could be read that way, but the density is tremendous here, and the expectations really are higher. (note, when you say "a player" it's like saying 'C-level" - you sound like a suit.) From what I've seen, people in the midwest that are really, really good? they can telecommute to here. The standards, from what I've seen, for the telecommute jobs are even higher (well, that or the pay is lower. Sometimes both! companies recognize and exploit the fact that many people would much rather work from home and would much rather live in a place with a lower cost of living.) I'm just saying, the kid who wasn't quite good enough to get a job here? is probably good enough to get a job just about anywhere else. (of course, what you really want are the people that don't get the job, not because they aren't technically good, but because they don't have the social bullshit down or something like that.)
[1]http://eastwind.org/ moving back there would be, perhaps,
I've been planning a blog post for some time on "hidden principles of Silicon Valley"; basically the unsaid assumptions that the top investors seem to follow but the startup peanut gallery don't grasp. Just little tidbits I've gained from the writings of Peter Thiel, Paul Graham, Marc Andreesen, Mark Suster, Ben Horowitz, etc.
One example: lots of people decry the trend for valley startups to burn cash to grow market share. Silly startups, why can't they bootstrap? Why is LinkedIn trading at a 300+ P/E ratio? But the hidden assumption (which may be wrong) is that the winners of today's tech game will be around for a long time, generating billion-dollar cashflows for decades.
Peter Thiel explained it better than I can:
"PayPal is illustrative. 27 months in, its growth rate was 100%. Everybody knew that rate would decelerate, but figured that it would still be higher than the discount rate. The plan was that most of the value would come around 2011. Even that long-term thinking turned out to undershoot; the discount rate has been lower than ex- pected, and the growth rate is still at a healthy 15%. Now, it looks like most of PayPal’s value won’t come until in 2020.
LinkedIn is another good example of the importance of the long- term. Its market cap is currently around around $10B and it’s trading at a (very high) P/E of about 850. But discounted cash flow analysis makes LinkedIn’s valuation make sense; it’s expected to create around $2B in value between 2012 and 2019, while the other $8B reflects ex- pectations about 2020 and beyond. LinkedIn’s valuation, in other words, only makes sense if there’s durability, i.e. if it’s around to cre- ate all that value in the decades to come."
It never fails to amuse me that the mean HN poster is actually quite cynical about startups -- I think this is partly due to cynical people posting more.
'The sink or swim strategy was successful for all 1% of the successes'? [1]
Its easy to overgeneralize.
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[1] 'The sink or swim strategy was not successful for all 99x1% of the non-successes.'
Graham's statement about three-quarters of the value of YC's $10 billion portfolio being comprised of Dropbox and Airbnb counters this. It's the difference between the probability density function and the aggregated cumulative distribution function.
This is actually part of the founding logic of modern portfolio theory: let's suppose all start-ups have a 1% chance of making it to a billion and a 99% chance of going bust. From the start-ups' perspectives, the $1 billion exit outcome is an outlier scenario. If I put a few hundred of these guys in a portfolio, however, it would be improbable for not one of them to Instagram.
This oversimplifies as it assumes simple distributions and pre-known probability densities, but it illustrates one of the un-intuitive effects of the way variances combine mathematically.
Also, behind the strawman arguments there are some hidden truths but they have to be rephrased to be interesting, e.g. software isn't easy but it appears to be easy so lots of people enter the field that shouldn't. Also, people should be working on harder things but not for the reasons discussed in the article.