An Entrepreneurial Counter Culture is Looming – The Startup Market is Not OK(siliconangle.net)
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An Entrepreneurial Counter Culture is Looming – The Startup Market is Not OK
http://siliconangle.net/ver2/2009/09/18/an-entrepreneurial-counter-culture-is-looming-the-startup-market-is-not-ok/
36 comments
The big reason banks can say that about a house is that there is a house, which is a commodity (or at least, they were until recently), so if the deal does not work out the bank can sell the house.
Without collateral of some sort this will not work. And if you have collateral you could simply either sell that or mortgage that (and plenty of founders do).
Without collateral of some sort this will not work. And if you have collateral you could simply either sell that or mortgage that (and plenty of founders do).
I think without real collateral, banks should not get into this. It is very easy to file papers, slap up a web site and put some whiteboards up in cheap office, and have a "startup"; if you can get 200k a pop, vacuous startups will be manufactured at a great rate, very similar to how we manufactured $300k MacMansions for $100k a pop until that game blew up. The deposited money of ordinary citizens should not involved in something like you describe, and espeically not in collateralized startup obligations or insurance on the same or whatever else the dark-suited sociopaths will dream up.
However, a VC or hedge fund might get into it, as long the investors are millionaires who can afford the losses and presumably have or can buy the educated understanding of the risks.
On the other hand, if there were some sort of club or co-op I could join, that I could pay a small monthly fee, and that would then invest the aggregated fees in a new startup every couple of months, I might do that. Especially if I got to attend a monthly meeting, hear pitches from various people, network with other members and people in startups, and hopefully have an "in" should I ever apply for a job at one of the startups.
However, a VC or hedge fund might get into it, as long the investors are millionaires who can afford the losses and presumably have or can buy the educated understanding of the risks.
On the other hand, if there were some sort of club or co-op I could join, that I could pay a small monthly fee, and that would then invest the aggregated fees in a new startup every couple of months, I might do that. Especially if I got to attend a monthly meeting, hear pitches from various people, network with other members and people in startups, and hopefully have an "in" should I ever apply for a job at one of the startups.
If you had an algorithm to define the solution set of future successful startups, then you could just hire employees to implement the ideas and make yourself filthy rich.
That's a truly fascinating take - making investment look more like home banking.
I found the article was rather long and a bit confusing. I wanted to summarize and clarify it:
There are more companies these days, but VCs are funding the same number of companies as before with the same huge expectations. Why not instead fund more companies with a lower amount of cash so as to not miss some opportunities.
My answer: putting all your eggs in one basket in a competitive environment will likely lead to better results than spreading the money out among a bunch of different baskets. Most startups are going to fail anyways, even with $200K of funding because the markets they are hitting are not that huge, not to mention all the other hurdles. What funding a bunch of different companies does is make a clear market winner harder to come by, which screws everybody. It's better if there was one clear winner sooner rather than later. My bet is handing out smaller investments like $200K would actually make the IPO market worse since most companies would get too tired to ever make it big enough to IPO.
The quick answer to why IPOs have not been good recently (other than the economy sucking): Sarbannes-Oxley made it very expensive to IPO with big requirements which means that the next best exit is selling. To sell, you have to get big fast to become attractive to suitors. Profitability/revenue is not a requirement/important for selling to a larger company (they use startups to cheaply get new talent and good ideas rather than quickly adding new revenue streams). So why don't more companies focus on revenue as a backup plan? It's very distracting and doing so means you might only scrape by. With such a do or die environment, the goal is not to create good businesses which will survive, just ones that will become great.
The good thing is that as it has become cheaper to run a startup, people have more options and can create self-funded sustainable businesses aimed at smaller markets. You won't become a billionaire doing that, but you'll get by. That's fine with VCs though, they are after big returns. If you are comfortable with creating such a business, by all means do so, but don't be pissed when a VC is not interested, even if it does make a little money. There is clearly room for both. If you do hit on a massive market opportunity, they can always catch up with you later.
So what is something like Y Combinator? It is a cheap way to vet companies for VCs and angels who see too many startups without enough information on them to make a good value judgement on whether they'll succeed. You don't need $200K to do that, you just need a small amount of money.
There are more companies these days, but VCs are funding the same number of companies as before with the same huge expectations. Why not instead fund more companies with a lower amount of cash so as to not miss some opportunities.
My answer: putting all your eggs in one basket in a competitive environment will likely lead to better results than spreading the money out among a bunch of different baskets. Most startups are going to fail anyways, even with $200K of funding because the markets they are hitting are not that huge, not to mention all the other hurdles. What funding a bunch of different companies does is make a clear market winner harder to come by, which screws everybody. It's better if there was one clear winner sooner rather than later. My bet is handing out smaller investments like $200K would actually make the IPO market worse since most companies would get too tired to ever make it big enough to IPO.
The quick answer to why IPOs have not been good recently (other than the economy sucking): Sarbannes-Oxley made it very expensive to IPO with big requirements which means that the next best exit is selling. To sell, you have to get big fast to become attractive to suitors. Profitability/revenue is not a requirement/important for selling to a larger company (they use startups to cheaply get new talent and good ideas rather than quickly adding new revenue streams). So why don't more companies focus on revenue as a backup plan? It's very distracting and doing so means you might only scrape by. With such a do or die environment, the goal is not to create good businesses which will survive, just ones that will become great.
The good thing is that as it has become cheaper to run a startup, people have more options and can create self-funded sustainable businesses aimed at smaller markets. You won't become a billionaire doing that, but you'll get by. That's fine with VCs though, they are after big returns. If you are comfortable with creating such a business, by all means do so, but don't be pissed when a VC is not interested, even if it does make a little money. There is clearly room for both. If you do hit on a massive market opportunity, they can always catch up with you later.
So what is something like Y Combinator? It is a cheap way to vet companies for VCs and angels who see too many startups without enough information on them to make a good value judgement on whether they'll succeed. You don't need $200K to do that, you just need a small amount of money.
The writing in the parent is significantly better than the writing in the original post (the web page not on Hacker News). So, thanks, danielrhodes, for summarizing!
"Technology, however, isn’t the driver any more for startups. The scarce talent is business model engineering and product marketing"
How true is this? Sounds like wishful thinking from a non programmer to me.
(Please note : I am not saying that marketing/product engineering is not important. They (obviously) are. I just think "Technology, however, isn’t the driver any more for startups" is too broad a brush)
How true is this? Sounds like wishful thinking from a non programmer to me.
(Please note : I am not saying that marketing/product engineering is not important. They (obviously) are. I just think "Technology, however, isn’t the driver any more for startups" is too broad a brush)
I think his point is that scaling up on the web is a solved problem, which is mostly true. If you look at most startup's pitch/plan the biggest risks are not in technology.
Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). Contrast this with biotech where you're trying to cure diseases. Minimal market risk, tons of invention risk. Read more here: http://steveblank.com/category/vertical-markets/
Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). Contrast this with biotech where you're trying to cure diseases. Minimal market risk, tons of invention risk. Read more here: http://steveblank.com/category/vertical-markets/
"his point is that scaling up on the web is a solved problem, which is mostly true"
Maybe, but that isn't what "Technology, however, isn’t the driver any more for startups" means. "Technology" is a lot more than "scaling on the web", even in software based startups.
"Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). "
Steve Blank is also careful to qualify that statement with "for some types of startups" (unlike the author of this article, hence my "too broad a brush" judgment). Assuming every software startup, even when the web is used as an interface, is a "web 2.0" startup with minimal Invention risk is intellectual laziness.
"The scarce talent is business model engineering and product marketing"
This doesn't have any supporting arguments/evidence/data. sounds like something a non programmer MBA type person, for whom of course programming is easy and programmers are commodity hires (like say receptionists) would say. I'd like to hear a supporting argument for why great programmers, who are what startups are usually desperate to hire, are not "scarce talent", but marketing folks are. Sure, for some startups, that is no doubt true, but as a generalization it seems too broad, which was my point.
So yes I've read Steve's book too and like it a lot :-), but I don't think this dichotomy of risks supports the original article much.
Maybe, but that isn't what "Technology, however, isn’t the driver any more for startups" means. "Technology" is a lot more than "scaling on the web", even in software based startups.
"Steve Blank would say there's Market Risk (will your customers want it?) but minimal Invention Risk (can you deliver it?). "
Steve Blank is also careful to qualify that statement with "for some types of startups" (unlike the author of this article, hence my "too broad a brush" judgment). Assuming every software startup, even when the web is used as an interface, is a "web 2.0" startup with minimal Invention risk is intellectual laziness.
"The scarce talent is business model engineering and product marketing"
This doesn't have any supporting arguments/evidence/data. sounds like something a non programmer MBA type person, for whom of course programming is easy and programmers are commodity hires (like say receptionists) would say. I'd like to hear a supporting argument for why great programmers, who are what startups are usually desperate to hire, are not "scarce talent", but marketing folks are. Sure, for some startups, that is no doubt true, but as a generalization it seems too broad, which was my point.
So yes I've read Steve's book too and like it a lot :-), but I don't think this dichotomy of risks supports the original article much.
I think we're agreeing. As I do for all blogs, I just assumed the courtesy implicit prelude: "This is my opinion shaped by my experiences and most likely only applies to the system I'm currently interacting with."
I mostly agree with his sweeping generalization if applied to, say, the subset of startups that get coverage on Techcrunch.
I mostly agree with his sweeping generalization if applied to, say, the subset of startups that get coverage on Techcrunch.
"I think we're agreeing."
Yes we are.
"As I do for all blogs, I just assumed the courtesy implicit prelude: "This is my opinion shaped by my experiences and most likely only applies to the system I'm currently interacting with.""
As did I, but if, as a writer, I made an unqualified claim (even if true) that is completely out of whack with my readers experience, I think it is fair to get push back. This is perhaps due to my coming across this article on HN vs directly on the original site.
I think the article is a decent one (not great, but decent).
"I mostly agree with his sweeping generalization if applied to, say, the subset of startups that get coverage on Techcrunch."
As would I. But this is HN. :-)
Yes we are.
"As I do for all blogs, I just assumed the courtesy implicit prelude: "This is my opinion shaped by my experiences and most likely only applies to the system I'm currently interacting with.""
As did I, but if, as a writer, I made an unqualified claim (even if true) that is completely out of whack with my readers experience, I think it is fair to get push back. This is perhaps due to my coming across this article on HN vs directly on the original site.
I think the article is a decent one (not great, but decent).
"I mostly agree with his sweeping generalization if applied to, say, the subset of startups that get coverage on Techcrunch."
As would I. But this is HN. :-)
I can't speak directly for John - I'll let him do that when he gets up in the morning and reads this thread....
.... but if I were to interpret that sentence and edit it to better clarify meaning (which in retrospect, I probably should have done since I'm the site's editor), I would put the qualifier "most" in that sentence, so it would read:
"Technology, however, isn’t the driver any more for [most] startups."
We see that to be quite true when you look at the base building blocks of many web startups. They're largely the same underneath the UI, same development environments, same infrastructure, and many even run on common CMSs, and it's the positioning (i.e., the marketing) of the startup that's the key differentiator.
That marketing influences the community that floods the site, how they perceive the site, and thus how they use the site (which affects the iterative direction of the site).
.... but if I were to interpret that sentence and edit it to better clarify meaning (which in retrospect, I probably should have done since I'm the site's editor), I would put the qualifier "most" in that sentence, so it would read:
"Technology, however, isn’t the driver any more for [most] startups."
We see that to be quite true when you look at the base building blocks of many web startups. They're largely the same underneath the UI, same development environments, same infrastructure, and many even run on common CMSs, and it's the positioning (i.e., the marketing) of the startup that's the key differentiator.
That marketing influences the community that floods the site, how they perceive the site, and thus how they use the site (which affects the iterative direction of the site).
"Technology, however, isn’t the driver any more for [most] startups."
Well that is marginally better, but it still assumes a certain kind of startup as evinced by the statement "that marketing influences the community that floods the site,".
You don't need a "flood" of a site by a "community" to have a successful startup. You need customers . Whether customers are pulled in my deliberate "marketing" or technological superiority providing differential capability depends on the exact offering.
If you confine the technology behind a startup to things like using open source CMS es as "building blocks", then of course technology and programming are commodities, and the "scarce talent" is indeed marketing, not programming.
I could continue, but my original point was that it was an over broad generalization, which is addressed if you are talking about the kinds of startups using off the shelf building blocks as their "technology" and have no real technological differentiator, and therefore don't need excellent programmers (who are very hard to find- just ask anyone running a "non cms" startup.)
Under those circumstances, (in other words, with a narrower focus than implied in the original sentence ) the original claim is completely valid. Under those assumptions, technology is not the driver and "scarce talent" is indeed marketing. I concede the argument.
Well that is marginally better, but it still assumes a certain kind of startup as evinced by the statement "that marketing influences the community that floods the site,".
You don't need a "flood" of a site by a "community" to have a successful startup. You need customers . Whether customers are pulled in my deliberate "marketing" or technological superiority providing differential capability depends on the exact offering.
If you confine the technology behind a startup to things like using open source CMS es as "building blocks", then of course technology and programming are commodities, and the "scarce talent" is indeed marketing, not programming.
I could continue, but my original point was that it was an over broad generalization, which is addressed if you are talking about the kinds of startups using off the shelf building blocks as their "technology" and have no real technological differentiator, and therefore don't need excellent programmers (who are very hard to find- just ask anyone running a "non cms" startup.)
Under those circumstances, (in other words, with a narrower focus than implied in the original sentence ) the original claim is completely valid. Under those assumptions, technology is not the driver and "scarce talent" is indeed marketing. I concede the argument.
Yeah, I think there's a narrower focus than what might have been originally implied. I'll let John come in tomorrow and clarify, but most of what John and I deal with are either Web startups or tech sector directly related to web (cloud, hardware, consulting, analysis firms, social media and design firms, iPhone design firms, Facebook development houses, ad agencies that monetize one or more of the aforementioned company types).
This is our world, and though the Silicon Valley startup world encompasses more than these types of companies, this is what was likely in his mind when he wrote it (and the context by which I interpreted the post).
This is our world, and though the Silicon Valley startup world encompasses more than these types of companies, this is what was likely in his mind when he wrote it (and the context by which I interpreted the post).
That remark, as well as the phrase "a business person who can’t code anymore" made me a little suspicious of this guy. But I agree that there is unmet need at the lower end of business investments.
Most technological innovation today is due to better available resources (CPU, RAM, bandwidth, etc.) rather than say, a better algorithm. The question then becomes: not can you make it, but can you sell it?/will people use it? That's a much different game.
"The question then becomes: not can you make it, but can you sell it?"
This is again, over simplification. (as a matter of fact the exact same oversimplification made by the author of the original article.)
The relative difficulty of "Making it" vs "selling it" depends on what "it" is.
Without a qualifier narrowing down the "it" (e.g another social networking site with no real capability difference from what exists today. In such a case, marketing is much more important than technology) what you say is wrong.
This is again, over simplification. (as a matter of fact the exact same oversimplification made by the author of the original article.)
The relative difficulty of "Making it" vs "selling it" depends on what "it" is.
Without a qualifier narrowing down the "it" (e.g another social networking site with no real capability difference from what exists today. In such a case, marketing is much more important than technology) what you say is wrong.
"The scarce talent is business model engineering and product marketing – building for scale isn’t the problem anymore. I can build a hack protytype that works well into the "validation" stage to establish a funding event or customer revenue stream then use the new capital to rebuild, hire and grow."
This interestingly follows my own career growth. I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. Around that time I switched teams, and have since been the tech lead for our marketing team. It might sound less sexy to other engineers, but getting to be on the bleeding edge of marketing for virtual economies is constantly challenging and fun; especially with IMVU's data driven culture.
This interestingly follows my own career growth. I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. Around that time I switched teams, and have since been the tech lead for our marketing team. It might sound less sexy to other engineers, but getting to be on the bleeding edge of marketing for virtual economies is constantly challenging and fun; especially with IMVU's data driven culture.
Do you think IMVU would be the great company it is today if it started with two product marketing folks and one business "model engineer" and all the programming was outsourced to "commodity" coders in elance.com or getafreelancer.com?
that seems to be a reaction to an exaggeration of what Tim said. He clearly said(emphasis mine)
"I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. "
I read it as, "Once we got reliability sorted out, the bottleneck moved to marketing/product development."
He never said IMVU could have been built without good programmers(of which class, he is an instance), but product dev/marketing became (or were) equally important (or more important) and so he moved to that team. At least that's how I read it
"I was the tech lead responsible for scalability/reliability at IMVU for a long time, but eventually our bottleneck clearly shifted from reliability back to marketing/product development. "
I read it as, "Once we got reliability sorted out, the bottleneck moved to marketing/product development."
He never said IMVU could have been built without good programmers(of which class, he is an instance), but product dev/marketing became (or were) equally important (or more important) and so he moved to that team. At least that's how I read it
I agree. However the point I was trying to make is that technology expertise continues to be a "scarce talent" which seems to be the opposite view of that supported by Tim's post.
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I can second that, particularly for IMVU. The economics in play there are deep and complicated on many levels.
Yeah, here's a little known fact about IMVU's economy: Most products allow derivation, which gives content creators the ability to tweak/remix/reskin the product and publish the changes back to the catalog. Pick a markup for the remixed version and presto, everyone in the derivation chain gets paid their respective markups for every sale. There are only a handful of root nodes; nearly every product is a derivation of another product.
Did you take a leaf out of Ted Nelsons book for that or did you come up with it independently ?
Which book are you referring to?
I wasn't the one who came up with the idea for this feature. The initial version of IMVU had this feature, so it's at least 5 years old.
I wasn't the one who came up with the idea for this feature. The initial version of IMVU had this feature, so it's at least 5 years old.
Ted Nelson had a project called Xanadu, that amongst many other things kept track of partial contributions to derivative creations.
If you came up with this independently you may want to look into to the Xanadu project for more inspiration along these lines, it is definitely very interesting reading.
If you came up with this independently you may want to look into to the Xanadu project for more inspiration along these lines, it is definitely very interesting reading.
Ahh yes, I'm familiar (though not familiar enough) with project Xanadu. The concept of keeping track of derivations is fairly common; far less common is the idea of derivation for the express purpose of indicating participation in the value chain and thus participation in the compensation.
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Beyond the product side of the economy, which is fascinating to me in it's own right (for some of the reasons you mentioned), the service economy around room rental, sales positions for goods and modeling services are just as interesting as well (let alone the complications of exchange rate, credit inflation, and other economic concerns).
I really am enjoying the thread here on my post. Interesting to see some of the comments thinking that I'm anti-development with my quote about product mktg and validation is the scarce resource. Of course great architects and developer are the scare resource but I've seen many code a great solution right now a cul de sac of no market.
to me the biggest issue driving this counterculture that I'm seeing is "trust" of the capital markets. Especially since most of the productive actors in this marketplace have lived in a successful open source movement culture for 25 years. The capital markets (VCs) are at odds with this culture.
There are many other points in the post that I would be happy to discuss if there is interest.
to me the biggest issue driving this counterculture that I'm seeing is "trust" of the capital markets. Especially since most of the productive actors in this marketplace have lived in a successful open source movement culture for 25 years. The capital markets (VCs) are at odds with this culture.
There are many other points in the post that I would be happy to discuss if there is interest.
With cloud computing rising to prominence as the underpinning of many modern web applications the amount of technology already 'assumed' in any new application design.
This trend seems to align with John's key point.
This trend seems to align with John's key point.
I read through the article but could not get the roots of "shrinking venture market" problem. Can someone please summarize/provide better explaination ?
do you really think handling a (non-technical) investor will be less work/less distraction than contracting part time? Sure, contracting takes time away from what you want to do, but it's pretty easy, and clients don't push you to do things that may not be in the interest of your customers.
This is the final draft based on the original Hacker News thread and conversation about a month ago.
1) You'd presumably want to make the offering mass-customizable, like a typical residential mortgage. There are a few levers to play with, sure, by 98% of the contract got vetted by the company lawyers once as being Good Enough and folks can take it or they can leave it. This allows you to close deals quickly, avoid spending much time teaching buyers about your process, and have the deals offered by junior staff. Most home buyers want a house, they don't want a mortgage. Most startup founders have a business to have a business, not to raise capital.
(Note that this would make "comparison shopping" easy.)
2) Automate and outsource more of the process. Banks can profitably do loans for $200,000 houses because there is an infrastructure of people who can say "Yep, this is a $200k house" and FICO scores, which let you push a button and get a quick estimate of my propensity to default in a second. I know we all think we're beautiful snowflakes, but I'm willing to bet there is a function which can be evaluated cheaply that is unfair, misses all sorts of edge cases, has numerous theoretical problems, and nonetheless is Good Enough when only $200k is at stake.
3) As you reduce the amount of marginal effort in each deal, it becomes possible to scale it to the moon, in a manner similar to e.g. mortgages and mutual funds. (The fund has a lot of money, the individual investors have comparitively little money and reduced exposure to any single investment, etc.)