In a world of venture capital | Hacker News Reader

In a world of venture capital

thezvi.wordpress.com

49 pointsabecedarius38 comments

IMO the technology industry should be focusing less on maintaining the status quo, where they are constantly and continuously dependent on VC to bootstrap businesses, and more on figuring out how to make it easier for brand new businesses to bootstrap themselves into existence.

Sure it's more "glamorous" to be wooed by VC firms, or to even get in the door, but IMO it skews priorities and is probably one of the main reasons there's such a high rate of failure in technology startups.

In today's environment, the real essence of what it means to "build a company from the ground up" gets lost in translation.

One thing is to consider is where the business model of VCs themselves stands on the spectrum between disruption and status quo.

Good point. I agree it deserves some clarification.

Broadly, I would define "status quo" as an environment where poor people are dependent on wealthy people. In this respect I think the "VC" paradigm is certainly worthy of the "status quo" label.

I think there's something here. I run a VC-backed company, and though we did that for a specific reason and have no regrets, I still feel like the world hasn't truly seen companies like Mailchimp, Campaign Monitor, GitHub, etc. (before those that raised, raised).

The VC world does tend to dismiss these types of companies, which I now realize is simply out of frustration at the lack of investable opportunity in these high-margin, growing, and sustainable companies.

I think we haven't given enough weight to the idea that what those companies have done is revolutionary, and is actually a lot more contrarian than the existing startup model.

I think a huge part of it is regulations. Imagine all the successful kickstarter projects that have ever existed. Then imagine a world where, if each of those people who "purchased" from these projects actually owned a percentage of that ongoing success?

I think, of the many points of attack in leveling the playing field, removing regulations that prevent small-time "investors" from owning equity in ventures is a candidate that's high on my list.

Although in a way that passes the buck (ie. you're still dependent on investors and giving away equity). I am looking forward to seeing how crowd-sourced loans and such will work. For example imagine a prosper.com at scale (catered specifically toward small business loans).

And wouldn't it be nice if regulations didn't prevent a small startup from creating such a crowd-sourced loan program?

How about a crowd-funded VC platform? I imagine alot of things are in the works that will help reduce the importance of the middle-man (ie. the investor). I look forward to seeing how that all comes together. But none of it will get off the ground until regulations are no longer the barrier to entry.

These things already exist. Check out Seedrs for example

There is a reason for all these regulations. While I am generally pro- deregulation, letting unsophisticated investor put money in start-ups is highly dangerous. While it would make it easier for genuine companies to raise money, the problem is it makes it much easier for scammers.

I think this used to be the case. But think about what the internet has done for "reputation" tracking. I think deregulation would open the "potential" for scammers, but at the same time would open a market for websites like a "Yelp for investors".

Given how much reputation "massaging" occurs on Yelp I am not sure this is a good model :)

The solution to preventing scamming is to make it harder for scammers to raise money than genuine businesses. The major difficulty is it is very difficult for unsophisticated investors (actually all investors) to make accurate judgments into the character of founders of start-ups. Even if we had a good reputational system for start-up founders (we don't), most founders (especially the most innovative ones) are not going to have a lot of history to support any such reputation system.

On the topic of reputation, Linkin^ has a good platform to monetrise this demand. They could charge users (and pay other users) for reputation endorsement (not just skill endorsement). They could have users provide an enormous amount of biographical detail and then have others verify (or not verify) this data. Make enough links and it will be very hard for a scammer to succeed over the honest.

^ Actually this could be a great idea for a start-up. Have people upload massive amounts of biographical data and then pay other people to endorse each data point - probably someone is doing it already and will soon tell me all about it :)

I agree reputation isn't an easy problem to solve. I think taken to its logical limit something like what you've described above is likely close to if not the correct solution.

Using the tried and true methods that already exist in the public key infrastructure of the web, I think the problem of tracking reputation online (in a reliable way) is something that will be solved in our lifetimes.

The real interesting question here is how many data points do you need to confirm to establish that someone is trustworthy?

Yelp only "works" because it isn't worth expending money on lawyers against obviously defamatory reviews.

Note what happens every time somebody tries to start "Yelp for doctors". Now add an extra couple zeros at stake for "Yelp for investment" and watch how many lawyers start flying when a negative review comes in.

I think the critical thing to make reputation tracking work online is if not only are the "reviewed" held accountable, but the "reviewers" are also held accountable. The only way that I know this could happen is if real / trackable identities are attached to the review.

We've already seen how well this works, actually. The Bitcoin community had a neat reputation tracking system. Remember pirateat40, the guy who ran a massive, really unsubtle ponzi scheme? He was one of the top-rated people on there. He actually used this to help encourage people to invest in his scheme.

I think one of the key pieces missing from most if not all online reputation tracking systems is there's no accountability. In other words, even if someone's online profile develops a reputation it's still an "anonymous" reputation. Unless the person makes a conscious attempt to make sure people can easily locate the person's real identity behind the online identity.

I think accountability in an online reputation tracking system would come from the network's ability to easily match the online reputation of the individual to the real identity of that individual.

If a person's real identity is at risk I think they're generally going to be far more cautious / conservative about what they put out there. Also makes it less likely that a person with a poor reputation online will be able to redeem that poor reputation just by creating a new profile.

Having a good reputation in the real world takes hard work. Not so much online.

You can go to vegas and blow $100,000 in a weekend, but you think it's too dangerous to let people put that in 10 seed stage startups? Because they might lose the money?

Further, I'm a sophisticated investor, I've done very well with complex derivative investments. I knew there was going to be a housing bubble in 2001 and profited from it until 2007. How many people were saying there was no bubble at that time?

I'm the very definition of a successful sophisticated investor, but I've been kept out of investing in startups-- the industry where I've worked for nearly 30 years-- because people like you think its "dangerous"?

Requiring me to have $1M in assets does not measure ones sophistication. Make it a $50k a year salary and a swear-under-penalty-of-perjury type form to cover the startup's butt and I'm ok with "accreditation".

Until then, it's just yet another way regulations give rich people better opportunities than regular people.

>You can go to vegas and blow $100,000 in a weekend, but you think it's too dangerous to let people put that in 10 seed stage startups? Because they might lose the money?

Casinos are highly regulated so I am not sure this is a good example.

I actually don't think it is dangerous because people will lose money, I think it is dangerous because scammers would have a major advantage over non-scammers in a deregulated start-up investment market. Like Gresham's Law [1] we would soon be left with a market totally dominated by scammers and all trust would soon be lost in start-ups (i.e 1920s). This was why the regulations in this area were brought in - to restore the trust of the public in the stock market.

1. http://en.wikipedia.org/wiki/Gresham's_law

You are a sophisticated investor, who has been very successful wth complex derivatives, predicted and profited from the housing bubble for 6 years...and you don't have $1MM in assets?

Well it is possible that the OP has a serious spending problem, but it does seem a little unlikely to be this successful and have so little.

> the problem is it makes it much easier for scammers.

The real problem is that the legal system isn't set up for a bunch of small investors to try to sue a company/officers doing genuinely fraudulent things.

If the stock is carved up over 100 people, it's very difficult to get unified action, so fraud tends to linger on.

There are lots of reasons that fraud can occur when you have lots of unsophisticated investors. The whole areas seems to be like vaccination - you get rid of a horrid disease by vaccination and once this happens everyone forgets about the disease and stops vaccinating only to then see the disease make a come back. Now that all the people with living memory of the 1920s and 1930s are dead we seem to want to repeat the experience.

I do think it would be great if we could find a way for everyone to participate in startups, but until we find a way to keep the scammers out then deregulation is not likely to end well for the unsophisticated investor.

This is one potential outcome of AngelList syndicates[0], which is I think one reason they have been vocal[1] about the SEC's implementing regulations of the securities reforms (including crowd-funding) that Congress called for in the 2012 JOBS Act.

[0] https://angel.co/help/syndicates [1] https://www.sec.gov/comments/s7-06-13/s70613-37.pdf

"and more on figuring out how to make it easier for brand new businesses to bootstrap themselves into existence."

Many don't want a traditional business...they just want that VC money to fund them, even if there is no proven business model.

I agree both approaches have merit. I would just say I think the market deserves to have both approaches to experiment with.

I think if the infrastructure existed to make it just as easy to bootstrap a company w/o VC funding, there would be more people taking that approach. After all, if both approaches (to startups) were comparable in terms of effort to set up, I would probably opt to keep my equity.

The downside of bootstrapping is that it takes longer (as covered in PG's various "money" essays). Money isn't the only currency, time is another, and what VCs REALLY offer is a change to speed up time to market and profitability, which is important when you really only have 40-60 productive years and taking funding gives you the opportunity to double the number of shots you get in that time.

I think about this every minute we're spending on client stuff instead of our main product. Still not worth the loss of independence and control, for me, but I can see the attraction. No more hesitation before buying servers, hiring the people I would love to but can't afford at the moment, no time wasted in selling B2B services, a real physical office, a secretary to do the endless admin work...

Wow, this is almost a description of a pyramid scheme.

Investors invest because they think more investors will invest later. You need the brand name investors because investors need to see the brand name investors in your company's pitch, making it more likely there will be future investors. The firms are selling shares by promising (well, making a string indication) someone else will buy the shares at a higher price later. Also, you can make money by investing without the firm making money.

>> "We made the deadly mistake of thinking of MetaMed as a business that was trying to turn a profit and grow organically, rather than a start-up whose ‘profits’ would come from selling its stock to investors at a higher price. Even in the explicit context of a profitable case, this was still true."

When the author explains that the goal of the startup is to profit through selling its shares at ever higher prices, it seems like he's basically saying the entire industry is a giant game of Find the Greater Fool.

I'm sure I'm missing something though.

You're not missing anything. It's kind of intrinsic to the system-- when you have VC that wants really high rates of growth then they will require/force the startup to take a path that may be much higher risk but also much higher reward.

When you are building a business, you have to make decisions that keep you alive.

In the process you may have less likelihood of becoming unicorn but much higher likelihood of surviving.

EG: I think VCs want you to take a 1 in 10,000 chance at being a billion dollar company, vs a 1 in 1 chance of being a $100M company.

The other news here that I hadn't seen elsewhere: when and why did MetaMed fail? That was an idea I would like to have seen succeed. Is anyone else working on that?

It is an idea I would like to see succeed too, but I think the problem is there is no way to make money out of this service. I suspect it would work far better as a boot-strapped business offering a very high end service to the mega wealthy.

In the short term, charge at least as much for the service as it costs. In the long term, rely on the resulting wealthy and thankful patrons.

> Because another of the characteristic mistakes of young founders is to go through the motions of starting a startup. They make up some plausible-sounding idea, raise money at a good valuation, rent a cool office, hire a bunch of people. From the outside that seems like what startups do. But the next step after rent a cool office and hire a bunch of people is: gradually realize how completely fucked they are, because while imitating all the outward forms of a startup they have neglected the one thing that's actually essential: making something people want.

http://www.paulgraham.com/before.html

It is not only making something people want, you need to make something people will pay for, either directly or indirectly.

Could it be that "want" is now a type of currency? It seems that some of the things people "want" and get for free (GMail, Facebook, Twitter) have been converted to money somehow.

"Starting a business is not about doing business. Starting a new business is about raising investment."

"Fundamentally, the venture capitalist is asking: will this company be able to raise money in future rounds?"

I have given a lot of thought to, which is why the bigger venture capital firms dominate the market and make oversize profits while the other firms taken together make almost no profits

Is there some data on this?

AKA "The rich get richer"

What he's describing is a feudalistic, dysfunctional reputation economy.

I wish there a way to make everyone realize this at once, so we can abandon this mess wholesale and come up with something else.

The reputation factors dominate in light of the realization that the current Bay Area "tech" scene is built on taking behaviors (insider trading, market manipulation) that would lead directly to jail if done on public markets, and applying them to unregulated private equities. Since the people getting burned the hardest on the investment are young employees, no one seems to care, though.

This is also why there will probably never be a competing VC-driven tech hub, and why VC will always be extremely local. The VC business is that way because so much of the note-sharing and market/reputation manipulation is borderline unethical and it would be suicide to put too many of the conversations that actually matter in writing.

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