Given the odds, is taking venture capital the best way to get rich?(jacksonfish.com)
jacksonfish.com
Given the odds, is taking venture capital the best way to get rich?
http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/
7 comments
Paul, this says more about the people that you know than anything else. Nearly all the people I know who got rich from software were at Microsoft during the IPO. That doesn't prove much.
Tim Gill made close to $1b from Quark. Jim Goodnight probably made $5b from SAS. John Sall made $2b from SAS. Bill Gates made $50b from Microsoft. Technically, Microsoft took VC, but that was just a favor to give David Marquardt bragging rights... it was a nominal investment right before the IPO.
I could go on all day if you count $100m as rich, but we're just counting swans, here, not really proving anything
Tim Gill made close to $1b from Quark. Jim Goodnight probably made $5b from SAS. John Sall made $2b from SAS. Bill Gates made $50b from Microsoft. Technically, Microsoft took VC, but that was just a favor to give David Marquardt bragging rights... it was a nominal investment right before the IPO.
I could go on all day if you count $100m as rich, but we're just counting swans, here, not really proving anything
Now that I think about it, there's a strong selection bias here. Private companies are, well, private, and don't get very much news coverage. Many super-profitable private software companies that never took investment are undercovered by the media. 90% of the successful software companies that I meet at conferences like Business of Software have never come within three states of a venture capitalist.
Rather than looking at how many rich people took investments, it's more meaningful, in deciding whether or not to take VC, to look at the outcomes of founders who take VC.
Those outcomes are not disputed... about half fail outright, the rest mostly continue as zombies, a tiny number make the founders a million or two, and a very very very tiny number become big enough hits to make the founders truly wealthy.
Rather than looking at how many rich people took investments, it's more meaningful, in deciding whether or not to take VC, to look at the outcomes of founders who take VC.
Those outcomes are not disputed... about half fail outright, the rest mostly continue as zombies, a tiny number make the founders a million or two, and a very very very tiny number become big enough hits to make the founders truly wealthy.
I think you have to look at this comparatively though. The number of rich people is by definition small.
To make a comparison worth anything at all is a problem. While you might or might not like thinking of VCs as a filter, they do perform this function to an extent.
If your non-VC sample consists of mostly VC rejects, that's a problem.
To make a comparison worth anything at all is a problem. While you might or might not like thinking of VCs as a filter, they do perform this function to an extent.
If your non-VC sample consists of mostly VC rejects, that's a problem.
I wouldn't have written this if the rich people I knew were mostly from one company I'd worked at.
Because of YC I've met a wide cross section of people who got rich from software. From literally hundreds of different sources. (I'm sorry I forgot about you; between you and Wolfram I know 2 who didn't take investment.)
Because of YC I've met a wide cross section of people who got rich from software. From literally hundreds of different sources. (I'm sorry I forgot about you; between you and Wolfram I know 2 who didn't take investment.)
Like Joel said, isn't there still some selection bias there? I would think that even the people you've met because of YC are the ones who are connected to the outside funding "world" in some way.
I don't see where. I've met them (a) because they come as investors to Demo Day, (b) because they're famous founders we've invited to speak at YC or Startup School, or (c) at events like conferences, Foo Camp, etc. Where would there be selection bias in any of those things?
Perhaps it's more of a negative selection bias.
I know 9 people who have made $5-$10M from software companies they have founded without taking outside investment. Most of the money was made by selling out to a bigger company, although one guy still is doing his thing.
They don't go to conferences, aren't famous and don't invest in startups. Maybe that amount doesn't count as being rich, though.
I know 9 people who have made $5-$10M from software companies they have founded without taking outside investment. Most of the money was made by selling out to a bigger company, although one guy still is doing his thing.
They don't go to conferences, aren't famous and don't invest in startups. Maybe that amount doesn't count as being rich, though.
It really depends on your definition of rich. Most salaried employees would consider themselves rich with a couple of million in the bank. Many private company owners have this level of wealth, and many wouldn't desire a higher level of success. I guess if you want 'have my own jet' levels of wealth, sooner or later you'll need someone else's money to help, even if it is just to secure their contacts/expertise. It's probably neither complete causation, neither unlinked correlation, but rather a more symbiotic relationship. People on the way to great wealth pick up investors. Sometimes they are cause, sometimes they are effect.
There's three factors here:
(1) What does "rich" mean? If it is net worth of >$1bn, it is more common to have taken investment at some point. At $50mm, it is far less common.
(2) What does "investor" mean? If it is VC, it's not true at all that most rich people (by either definition) required investment. If it means they took at least one of equity-linked dollar for their business, then most did. But there are many, many wealthy people who have not taken $1mm+ in equity dollars. (Many can rely on bank financing, e.g. receivables LOCs.)
(3) When did they take it? Many rich people have taken substantial investment, but only after they had built substantial businesses and got to define the terms (example: Joe Mansueto at Morningstar).
If the question is whether it is necessary to take seven or more figures of equity dollars at an early stage to own equity whose worth could be reasonably estimated at $50mm+, then the answer is no (and asking rich people will verify that).
If, on the other hand, the question is what portion of the superrich ($1bn+) took investment somewhere along the way, then the majority likely will have.
However, I think the first question is a more useful and relevant question for people here.
(1) What does "rich" mean? If it is net worth of >$1bn, it is more common to have taken investment at some point. At $50mm, it is far less common.
(2) What does "investor" mean? If it is VC, it's not true at all that most rich people (by either definition) required investment. If it means they took at least one of equity-linked dollar for their business, then most did. But there are many, many wealthy people who have not taken $1mm+ in equity dollars. (Many can rely on bank financing, e.g. receivables LOCs.)
(3) When did they take it? Many rich people have taken substantial investment, but only after they had built substantial businesses and got to define the terms (example: Joe Mansueto at Morningstar).
If the question is whether it is necessary to take seven or more figures of equity dollars at an early stage to own equity whose worth could be reasonably estimated at $50mm+, then the answer is no (and asking rich people will verify that).
If, on the other hand, the question is what portion of the superrich ($1bn+) took investment somewhere along the way, then the majority likely will have.
However, I think the first question is a more useful and relevant question for people here.
Are you sure that's a good way of deciding?
To take investment you need to be able to convince someone that yours is a good investment. Your pool of people that could have done this at some point may be heavily weighted towards those tat did.
To take investment you need to be able to convince someone that yours is a good investment. Your pool of people that could have done this at some point may be heavily weighted towards those tat did.
That poll would suffer pretty badly from survivorship bias. Knowing that 75% of people who are rich took investment isn't useful without knowing what percentage of people who seriously tried and had some real potential to get rich took investment - if it was 99%, then taking investment actually looks pretty bad.
The Millionaire Next Door was somewhat interesting. However the follow-on book, "The Millionaire Mind" was packed with statistics instead of anecdotes and for me at least, had a number of ideas and changes to my perspective to offer.
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The author is talking about a decision that I don't think is made very often. Founders don't sit around thinking, "Gosh, should I do a VC backed business or a lifestyle business? Which has a bigger chance at wealth?" They generally chase the idea that they chase-- because they are passionate about it or because it falls into their lap. Based on that idea they say, "I could pull this off without someone else's money" or "I need to go find some money somewhere if I'm going to pull this off."
VC investment is great for founders, you can pay yourself a real wage (no more ramen), you can hire, and really make the company a success. Giving up 30% of the pie to have $5M in the bank is pretty good methinks.
Sure, you may get kicked out, and / or the company may fail, but with some cash in the bank you are THE MAN for a couple of years.
For the longest time I wouldn't have agreed with you but I had a change of heart while exhibiting at this one conference and this 21 year old guy came driving up in an expensive car while my 2004 Chevy Cavalier was being parked. There is a certain amount of hardship a person can take but it can go too far. Even going from Ramen to Cup of Noodles would be good sometimes.
Its not the question of whether or not to take VC, its a question of when. Timing is everything. For a lot of businesses, there is that brief moment where the extra money can help get you in the mainstream
The best way to get rich is selling insurances. There is good money to be made with what is basically shovelling papers and.. ... doing well in marketing / sales. And that's the kicker. Because the good sales people have much better jobs, which are interresting to the sales geek. But if you are the only smart guy in your region, you can pull it off quite easily. Off course it is boring work, that's the downside. And the real reason for taking up venture capital: to get your world changing idea funded (realized).
As a current entrepreneur and the son of a PhD physicist insurance salesman, I don't agree that the best way to get rich is to sell insurance. As far as I could tell, selling insurance seemed to be hard, slow, and not especially lucrative, even for somebody relatively smart.
It's not about IQ. It's about selling IQ. I know a guy pulling 500k who is at best a 100 on the IQ scale, but he creates instant rapport with a twinkle of his eye.
The danger of this method is that you're measuring how things were in the past. Maybe things are different now than they were 10 years ago. But considering how many people in how many different industries (from restaurants to hedge funds) use investors' money, my default assumption would be that it's a reasonable idea.