startingup

Here is the situation: an existing small, moderately profitable company has decided to stay out of VC circuit, stay private, run it as a life-style business. C corp involves double taxation, which S corp avoids. They had grander dreams once (hence C corp) but now the situation has changed.

Here is approximately how it happened: Japan exported heavily, piling up trade surpluses. Eventually the currency appreciated sharply (250 yen to dollar in 1980 to 100 yen to dollar by 1990), making Japan a first-world nation in terms of per-capita GDP. Yet, Japan's overall economic structure wasn't and still isn't as balanced as more mature industrial economies like Germany.

Imagine a kid who has been trained and trained from age 4 to be a world-class chess player (with no exposure to anything else). He/she could achieve world-champion chess player at 25, but would be a highly imbalanced individual. Japan's economic story in a nutshell.

You can see this when you travel to Japan: their service sector productivity sucks. Over-staffing is rampant. As a society they have chosen to redistribute the enormous surplus from exports to sustain inefficient employment in a lot of far-less-than-world-class businesses. Their totally undeveloped software sector shows the real cost of their mercantalism. Their woefully tiny housing (NOT to be attributed to population - Singapore has higher population density, has lower per-capita GDP than Japan, yet Singaporeans enjoy larger apartments and overall live better than the Japanese) is an everyday reminder of the cost.

On balance Japan has done fine, but considering that they are the hardest working people on the planet, they could have lived better, and could live better today, if they hadn't developed that export obsession. They gifted the rest of the world a lot of their hard work, while denying themselves those fruits.

As an outsider, I can't complain, I love my Japanese luxury car ;)

I have talked to a couple of immunology professors and they aren't really very comfortable with this mad rush to have a vaccine fix for everything.

This is a huge topic, but if any of you are planning to have kids, research this topic of vaccines. Do not blindly accept what your pediatrician says - they are not all that well-informed.

Keep in mind that BSD underpins Mac OS X.

The Federal Reserve also was massively complicit in the emergence of debt, so it is not a free market phenomenon. The Fed, in an attempt to fight the last bubble burst, kept interest rates low, and armed the speculators (hedge funds) with easy credit.

Basic ratios like debt to GDP have exhibited a strong long term tendency towards mean reversion. If that history proves right, we are in for one heck of a ride.

So if hundreds of start-ups hang on with grim determination that times will get better, times won't get better, the start-ups will just prolong their agony. The very reason some survive to emerge stronger is because others made way for them.

Be honest: isn't it harder today to get attention than it was in 2003? What does that indicate for the average start-up, however good it may be?

In fall of 2004, as Greenspan started raising interest rates in baby steps (very belatedly - housing was already bubbling up), Krugman was very opposed to those rate hikes. His analogy for the tech-telecom bust was with the post-bubble doldrums in Japan - and it was no time to be risking a slide back by rising rates.

In the event, directly as a result of that easy credit policy, we got the mother of all bubbles in housing, which has almost taken the entire financial system down with it. Krugman did not anticipate the bigger bubble that was brewing even as he was advocating continuing 1% interest rates (well below the rate of inflation even then!).

Economists like Nouriel Roubini, Steven Roach (then Chief Economist at Morgan Stanley), eminent people like Paul Volcker (Fed Chairman between 79-87), investors like Warren Buffet & Marc Faber all warned about the 2004-7 bubble in housing several times, for many years. Krugman had a very public voice during that entire time, but saw no problems with the Greenspan/Bernanke Fed.

It is worth remembering this real world record, as the world fetes his Nobel prize.

Asians, in particular, are good at acting deferentially, particularly in front of foreigners. The most extreme case are the Japanese - they are the easiest to underestimate race in the world (and the West did underestimate them). As you move west from Japan, you can progressively reduce the deference factor, crank up the self-confidence factor, until you arrive in California, perhaps the most self-confident place in the world. That deference - self-confidence dial works to a very good first approximation :)

So I am already used to much worse circumstances than the worst that is likely ahead in America. Having said that, what lies ahead for America is going to be very painful economically, even more so because Americans by and large have no recent memory of such economic pain, so lack the "inoculation" that lesser societies have built up due to periodic crises. Deep structural changes are inevitable - and such changes in the economy end up having profound cultural and social impact, some of which is unpredictable.

I would personally do fine both because my personal balance sheet is in fine shape and because I have a lot of inoculation. Can you say that about the average American?

These are the things I said we should be afraid of.

You can find the presentation, for example, at: http://www.slideshare.net/eldon/sequoia-capital-on-startups-...

A couple of common objections to my line of argument are:

a) debt to GDP is just an accounting number or paper ("we owe it to ourselves" - in a global sense) and we can adjust that without much consequence to the real world.

Response: Given that current incomes are not able to service the debt, the debt needs to be written down. As that debt gets written down (for example, if GM or Ford were to file for bankruptcy), there will be economic consequences like lay-offs. Those economic consequences are another way of saying that the projects that the debt financed were unviable and therefore have to be terminated.

Those layoffs will cause further debt erosion - those laid-off workers default on their credit card payments, for example. So there are real economic effects to that accounting fiction. Even the dot-com bubble needed several years to be worked out. This is a far bigger bubble.

b) The US savings rate is underestimated.

The savings rate underestimation argument actually used to cite rising asset values, particularly housing, not being counted in savings. Falling asset values kills that argument.

A whole lot of capital and labor needs to be repurposed, and it is going to hurt, even without the political system making things worse. History teaches us that the odds aren't very good on that front- it is not a Republican vs Democrat issue, nor for that matter a US vs Europe issue.

In your diagram, you need to complete the loop, to more accurately reflect reality:

[capital] <--> [financial system] <--> [projects] <--> [capital]

It is worth remembering how the financial system itself started breaking - it started with all those massively overvalued housing "projects" for which they lent money started going bad, which then spread to other credit classes like autos, commercial real estate and so on.

Ultimately, the financial system is choking on debt that became uncollectable, because the underlying projects that the debt financed proved economically unviable. In micro terms, household income could not service the debt on the house. None of the bailout schemes so far address that income issue. If they started mailing out checks to homeowners to help them pay their mortgages, they can stop house prices from falling, but at the cost of hyper-inflation. In chess terms, we are at an economic checkmate scenario - all options are bad. The least bad option may not be politically viable, so we have to consider really bad scenarios too. At this point it is unpredictable which of the bad choices will be made.

Here is a nightmare scenario: start to really worry if trade sanctions on China or outsourcing ban on India become a possibility. Such beggar-they-neighbor policies begot the Great Depression. We are not there yet, but how confident are you it won't happen once the US Congress gets "serious"?

But I do see a fall in my income, so I am tightening my belt - by which I mean things like eating out less, stretching out that laptop for another few months, buying fewer non-essentials, less expensive vacations and so on. That is all I am advocating.

It is a rational, non-panicky response to some fairly dire economic circumstances ahead. If you question whether the economic circumstances will become dire, well, bookmark this thread, come back in 1 year, 2 years and 5 years.

Income is what is used to service debt. Conventional mortgage rules limit you to 3x mortgage debt to annual income. So debt to GDP ratio is entirely appropriate.

The wealth figure you quote itself is bloated by debt - think of how houses increased in value due to all those easy loans they were handing out. Debt is a mathematical fact, unless discharged in some kind of bankruptcy, while the "wealth" is an accounting opinion, and valuations change. So as the debt comes due, more of it gets impaired, which means people who owned that debt have to write their assets down, which causes asset values to fall everywhere, ... classic debt-deflation. We are witnessing it right now.

The only meaningful end is when debt gets vastly reduced. By then asset valuations would be a lot lower too.

Here are a few things that happened in the last 10-20 years that have brought us to this point:

1. Debt became fashionable, even prestigious, world-wide. The most storied names in business became debtaholics. This includes the financial players like Goldman Sachs and Morgan Stanley, but industrial-companies-that-became-financial-companies, like GM, Ford, GE and so on. This level of comfort with debt is unprecedented in history, and the historical parallels are dark.

2. The most prestigious nation on earth piled on debt, and other nations copied.

3. US savings rate dropped from 10% in the mid 80s to near zero today, and it even went negative for a period.

History teaches us that such toxic debt episodes are followed by a prolonged hang-over, followed by a social aversion to debt and eventual recovery. The patient has just passed out - the hanger over hasn't even started. It is way too soon to talk about a recovery.

So it is very appropriate to be very concerned and fearful for our collective futures. What can we do as individuals? Swear off debt, live very frugally, lower our expectations.

To paraphrase, just because a lot of people are panicking doesn't mean we shouldn't be really afraid!

1. It has a fast Javascript VM, that converts Javascript into native code, cutting through lots of layers.

2. Each Javascript app (i.e a tab) runs in its own process, which the browser manages. So effectively Chrome is the OS layer as far as your JS apps is concerned.

3. The browser provides a nice control panel for managing those tasks and provides stats about its usage - again tradtionally what you wanted from an OS.

4. Chrome is not yet cross-platform, but we can expect it to be cross platform in due course. It is open source with a BSD license, so I am guessing lots of people have already started compiling it to every platform on earth. Expect unofficial distros soon.

5. Layering Chrome on top of a very stripped down Linux or BSD kernel, letting Chrome do all the GUI work is possible. Chrome does not need MFC, it is layered directly on top of a lower level graphics library (Win32). The calls Chrome needs could be done on top of BSD fairly easily. In fact, that is how Chrome (or Firefox for that matter) is really cross-platform - they come with their own widget sets (i.e MFC equivalent) rather than relying on the specific platform's widget set. Incidentally, Java does the exact same thing.

6. OEMs could come up with a 20-30 MB distribution of Chrome, with everything included (kernel, libraries, JS, Flash etc) and bundle it as a web top.

So, yes, Chrome is an alternative to traditional operating systems. The fact that it would include a stripped down BSD kernel doesn't count: from the application perspective Chrome is the OS.

Snark is all fine and dandy, but occasionally exercising the brain cells a little bit keeps them in good working order.

jQuery just rocks.

Forget the ownership aspects of whatever the employee is creating on the side. Would you be happy as his/her manager to realize his/her mental efforts are going somewhere else?

Think hard before you answer.

To be honest, I hugely enjoyed it, though it was a kind of marriage of convenience at first.

I am 40 now, and have had a fair bit of success in software (enough to be an occasional angel).

So don't worry - there are lots of slow learners like me!

It would be good to get gross statistics - without revealing company specific details - of how many got angel funding, average funding etc. It would help hackers calculate their odds ...

The folks that YC funds, by and large, have no business experience at all, so it is likely well worth it for them. But you can "go to school" (the school of hard knocks, that is) to learn those things YC brings too. That learning process takes time - time you may not have.

Ironically, in a serious downturn you turn out to have plenty of time. Companies like Flickr came out in a fairly relaxed time - nothing much was happening anyway. They actually took their time (Flickr was a side project of a site they called Game Never Ending which was on for a long time ...)

By comparison, we are now in a relatively frenzied times, and success is necessarily harder to achieve, so every bit of assistance you can get may be worth it.

To visualize the kind of "no body cares" times, look at the business of starting a classy restaurant right about now (with restaurant chains all around folding). You have to be pretty passionate to keep going at it. Funding? Unlikely.

Google is the most efficient at this game today, as measured by how they transform their human labor into value. Revenue per employee is the best proxy for value-added per employee.