The Problem with Founders (2014)(techcrunch.com)
techcrunch.com
The Problem with Founders (2014)
http://techcrunch.com/2014/07/20/the-problem-with-founders/
9 comments
About 10% of VC-funded companies are big successes, defined as making 10x their investment. About 20% go broke, and most of the rest end up in zombie mode, able to pay their bills but not pay off their investors.
Most founders, therefore, are doomed to be losers.
But VCs look for people who are sure they will succeed. Most of them turn out, in hindsight, to be wrong. This is inherently going to push a sizable fraction of them into mental health issues.
Most founders, therefore, are doomed to be losers.
But VCs look for people who are sure they will succeed. Most of them turn out, in hindsight, to be wrong. This is inherently going to push a sizable fraction of them into mental health issues.
What every founder will tell you - https://www.youtube.com/watch?v=SVKKRzemX_w [Louis Armstrong - Nobody Knows the Trouble I've Seen (1962)]
...and it's true.
...and it's true.
> has now become something akin to Hollywood: a world of stars amid extras and hopefuls.
wow, nailed it.
wow, nailed it.
The numbers in this article are way off. A higher end employee (senior/chief engineer) who joins at say #30 in a company will still have a decent exit on a $250million exit. I say this as someone experienced in this.
s/will still/can/g
Totally true. I developed the product that was responsible for >50% of the company's revenue and walked away with 0.04% at exit.
It was decent, not life changing. I probably should have negotiated significantly higher. Hindsight etc.
It was decent, not life changing. I probably should have negotiated significantly higher. Hindsight etc.
That is $100k or $25K per year assuming a 4 year vesting schedule. Even assuming that you did not take a pay cut relative to working for a bigger or more established company, it seems a little low reward for the risk involved. Particularly considering that $250M exits have low odds to begin with.
It was low risk on my behalf. A full time job taken in 2000 when everyone was letting people go (and I had been out of work for 6 months despite a high profile in the open source community). At a decent pay.
I do think I should have at least negotiated double what I had. But I was young and had no clue about stock and exits etc. Even given that, I did ok considering I was #30.
I still stand by what I said. The numbers are a bit off. A $250m exit is good for most of the early employees. Although of course a $250m exit is extremely rare.
I do think I should have at least negotiated double what I had. But I was young and had no clue about stock and exits etc. Even given that, I did ok considering I was #30.
I still stand by what I said. The numbers are a bit off. A $250m exit is good for most of the early employees. Although of course a $250m exit is extremely rare.
A full time job taken in 2000 when everyone was letting people go (and I had been out of work for 6 months despite a high profile in the open source community). At a decent pay.
While I grant that at that point in my life I was older than the startup norm (40 but very productive due to a quarter century's experience and study from the very start of software engineering), there was some serious value to such a job back then. I.e. a lot better than the job I took in semi-desperation at Lucent in 2001 just when it started downsizing from 106,000 to 35,000 employees....
And doing "OK" with equity being employee #30 plus the wonderful resume enhancer of "my product earned over 50% of the company's revenues" is not bad, not bad at all. Being able to tie a serious technical accomplishment to an outsized portion of the company's bottom line speaks to everyone.
While I grant that at that point in my life I was older than the startup norm (40 but very productive due to a quarter century's experience and study from the very start of software engineering), there was some serious value to such a job back then. I.e. a lot better than the job I took in semi-desperation at Lucent in 2001 just when it started downsizing from 106,000 to 35,000 employees....
And doing "OK" with equity being employee #30 plus the wonderful resume enhancer of "my product earned over 50% of the company's revenues" is not bad, not bad at all. Being able to tie a serious technical accomplishment to an outsized portion of the company's bottom line speaks to everyone.
This is a personal success story, but...wasn't his point that unicorn employees at this level are going to (be able to) retire...along with the founders...while the next tier down only gets the downpayment on a mortgage...so net/net there is no "game change" unless one is deep in equity or the exit is $1Bn or more. That math is order of magntitude correct, isn't it? I don't see the conflict with what you are saying, you guys are both saying something that is true to some extent.
Sorry, but that wasn't what I would call decent, though still congrats on being a key element in a project that size. Pity you did not get a fairer share.
Yeah, you should have negotiated for more if you tech lead on the most important product. 4 basis points for that is just wrong. It should have been 40 basis points.
I'd be curious to know what happened afterward in his career.
The main benefit to joining a startup isn't even the equity (it's crappy everywhere, these days) but the opportunity for advancement. If you can get a high-level position that wouldn't otherwise be available and get promoted quickly, it can be worth it for the credibility.
That said, many startups actually under-title their people and get into the social-climbing mentality in which the develop a pattern of hiring people above their old hands. If you work for one of those, then you should just get out. Companies tend to be either in a promote-from-within mode or a install-flashy-outsider mode, with not much of a middle ground. The second type of startup is good if you're an outsider, for bumping your comp and title, but not a place to stay for more than a couple of years and certainly not a place where you should work more than enough to hold place.
The main benefit to joining a startup isn't even the equity (it's crappy everywhere, these days) but the opportunity for advancement. If you can get a high-level position that wouldn't otherwise be available and get promoted quickly, it can be worth it for the credibility.
That said, many startups actually under-title their people and get into the social-climbing mentality in which the develop a pattern of hiring people above their old hands. If you work for one of those, then you should just get out. Companies tend to be either in a promote-from-within mode or a install-flashy-outsider mode, with not much of a middle ground. The second type of startup is good if you're an outsider, for bumping your comp and title, but not a place to stay for more than a couple of years and certainly not a place where you should work more than enough to hold place.
The article is talking more about entrepreneurship being an avenue for establishing a personal brand.
> Credit really only goes to founders when a startup exits for less than $250 million. Under a $1 billion, a handful of the early employees will be able to receive credit. And above $1 billion, the number of early employees who can claim credit continually increases with exit value all the way up to a Google or Facebook, where people will mention and receive acknowledgment for even their triple-digit employee number.
They're saying employee #20 at a $250M exit doesn't get mentioned much generally. Employee #20 at a google/facebook exit does, generally.
> Credit really only goes to founders when a startup exits for less than $250 million. Under a $1 billion, a handful of the early employees will be able to receive credit. And above $1 billion, the number of early employees who can claim credit continually increases with exit value all the way up to a Google or Facebook, where people will mention and receive acknowledgment for even their triple-digit employee number.
They're saying employee #20 at a $250M exit doesn't get mentioned much generally. Employee #20 at a google/facebook exit does, generally.
The founder/engineer social class division is one of the reasons why I expect the Silicon Valley ecosystem to implode and will be disappointed if it doesn't.
First, there are two types of founders: Made Founders and Hustling (it's a nicer word than "Marginal") Founders. Made Founders (often called "serial entrepreneurs") already have it worked out that, unless they rip off their VCs, they'll get a soft landing. I won't say that they don't work, but they have enough investor-rank friends that they don't really worry about anything, because if their companies tank, they'll be lined up with VP-level positions where they'll probably make twice the salary that they had as founders (typically, founders don't make more than $175k). They probably put in 30-60 hours per week, but they work on the fun stuff and have double-digit equity so... yeah. They worry more about managing up into the investor ranks than running a company, for obvious reasons. (If you build a successful company but lose control and most of your reward, you lost. If you fail but the investors like you and make you a Partner at their VC firm, you won.) It ain't a bad gig, although it's a bit boring because, well, you're a corporate executive. Being a Made Founder is based on pre-existing social class; either something you're born with, or something you luck into. Merit's not a part of it. Hustling Founders are the ones who don't have investor-level people pulling strings all the time and who really, really, really fucking have to pound the pavement-- and hope that a Made Founder doesn't decide to compete in their space, because then they're up against someone who's going to have 50 times the capital.
In the 1960s, all founders were of the Hustling variety because the pedigreed people were still in banking, during the Bateman days when it wasn't a real job (3-martini lunch), and in a time when the pedigreed asswipes still thought the West Coast unprestigious.
What the OP is describing is a cultural shift as pedigreed people with generational social connections jump into the game as Made Founders. They've never been employees or subordinates of any kind (except to VCs) so they don't have the empathy that it takes to run a company, and they tend to be low on competence spectrum (since the mainstream business elite puts its successes in hedge funds and private equity to manage billion-dollar deals, and throws its failures into VC and VC-funded tech).
What hoodwinks a lot of people is that the Made Founders are great at presenting the appearance of Hustling Founders, and thereby they justify getting 100 times the equity as the employees they manage. In reality, most of the Hustling Founders (a middle-class crew) have been driven out and are unfundable due to a lack of social connections, and also because the amount of stress involved in dealing with VCs and abusive investor-level personalities is such a mental-health crusher that even normal people become paralytically neurotic after about 5 years in that game.
First, there are two types of founders: Made Founders and Hustling (it's a nicer word than "Marginal") Founders. Made Founders (often called "serial entrepreneurs") already have it worked out that, unless they rip off their VCs, they'll get a soft landing. I won't say that they don't work, but they have enough investor-rank friends that they don't really worry about anything, because if their companies tank, they'll be lined up with VP-level positions where they'll probably make twice the salary that they had as founders (typically, founders don't make more than $175k). They probably put in 30-60 hours per week, but they work on the fun stuff and have double-digit equity so... yeah. They worry more about managing up into the investor ranks than running a company, for obvious reasons. (If you build a successful company but lose control and most of your reward, you lost. If you fail but the investors like you and make you a Partner at their VC firm, you won.) It ain't a bad gig, although it's a bit boring because, well, you're a corporate executive. Being a Made Founder is based on pre-existing social class; either something you're born with, or something you luck into. Merit's not a part of it. Hustling Founders are the ones who don't have investor-level people pulling strings all the time and who really, really, really fucking have to pound the pavement-- and hope that a Made Founder doesn't decide to compete in their space, because then they're up against someone who's going to have 50 times the capital.
In the 1960s, all founders were of the Hustling variety because the pedigreed people were still in banking, during the Bateman days when it wasn't a real job (3-martini lunch), and in a time when the pedigreed asswipes still thought the West Coast unprestigious.
What the OP is describing is a cultural shift as pedigreed people with generational social connections jump into the game as Made Founders. They've never been employees or subordinates of any kind (except to VCs) so they don't have the empathy that it takes to run a company, and they tend to be low on competence spectrum (since the mainstream business elite puts its successes in hedge funds and private equity to manage billion-dollar deals, and throws its failures into VC and VC-funded tech).
What hoodwinks a lot of people is that the Made Founders are great at presenting the appearance of Hustling Founders, and thereby they justify getting 100 times the equity as the employees they manage. In reality, most of the Hustling Founders (a middle-class crew) have been driven out and are unfundable due to a lack of social connections, and also because the amount of stress involved in dealing with VCs and abusive investor-level personalities is such a mental-health crusher that even normal people become paralytically neurotic after about 5 years in that game.
> Merit's not a part of it.
If you are good enough to build something people want, skip VCs and get paid directly from users.
If you are good enough to build something people want, skip VCs and get paid directly from users.
+1.
What michaelochurch seems to ignore is that it is now so easy and cheap to start alone and without investment something with a non zero probability that people will want. It's not easy - I am trying to do that, so far unsuccessfully - but definitely doable, by renting a cheap VM from Digital Ocean or Amazon and start making a web app, or putting a mobile app in the App Store or Play Store.
What michaelochurch seems to ignore is that it is now so easy and cheap to start alone and without investment something with a non zero probability that people will want. It's not easy - I am trying to do that, so far unsuccessfully - but definitely doable, by renting a cheap VM from Digital Ocean or Amazon and start making a web app, or putting a mobile app in the App Store or Play Store.
It's a good post, but I think the success of ycombinator speaks against your concept of "made founders" as a common thing.
I will agree though, they definitely exist and they definitely suck. (Born into it? No, I think they worked their ass off into ivy league university, but now feel they can coast .. which is understandable, it's hell getting into Ivy league universities. To imagine that you now have to sacrifice the next phase of your life probably too much to bear for most)
I will agree though, they definitely exist and they definitely suck. (Born into it? No, I think they worked their ass off into ivy league university, but now feel they can coast .. which is understandable, it's hell getting into Ivy league universities. To imagine that you now have to sacrifice the next phase of your life probably too much to bear for most)
It's hell getting into Ivy League universities for middle class people.
Rich kids from well-connected families take it for granted. Why do you think parents in New York pay $40,000 per year from pre-school to high school? Because you're an auto-admit at many of the Ivies (Harvard, Yale, and Princeton are still a reach unless you're top-25%, but there's always Stanford) if you attend one of the top 5 prep high schools.
Also, Ivy League is one of the less important elements of pedigree. Pedigreed (read: well-connected, not necessarily well-educated and certainly not cultured) people who don't go to elite schools still have their advantages. Also, the middle-class smart kids and the pedigreed legacy kids tend not to mix at elite schools anyway. A prestigious university provides a bump, but not as much as one thinks. It's not like going to Harvard makes you set for life. I know Harvard grads making $50k as social media whatevers at dipshit ed-tech startups. Middle-class people tend to overestimate the connections-forming capacity of college. It certainly happens, but the tendency for 18- to 21-year-olds (well, everyone, but especially adolescents) is for like to group with like and that means that the middle-class smart kids and the dumbasses-with-family-connections don't mix.
Rich kids from well-connected families take it for granted. Why do you think parents in New York pay $40,000 per year from pre-school to high school? Because you're an auto-admit at many of the Ivies (Harvard, Yale, and Princeton are still a reach unless you're top-25%, but there's always Stanford) if you attend one of the top 5 prep high schools.
Also, Ivy League is one of the less important elements of pedigree. Pedigreed (read: well-connected, not necessarily well-educated and certainly not cultured) people who don't go to elite schools still have their advantages. Also, the middle-class smart kids and the pedigreed legacy kids tend not to mix at elite schools anyway. A prestigious university provides a bump, but not as much as one thinks. It's not like going to Harvard makes you set for life. I know Harvard grads making $50k as social media whatevers at dipshit ed-tech startups. Middle-class people tend to overestimate the connections-forming capacity of college. It certainly happens, but the tendency for 18- to 21-year-olds (well, everyone, but especially adolescents) is for like to group with like and that means that the middle-class smart kids and the dumbasses-with-family-connections don't mix.
> It's hell getting into Ivy League universities for middle class people.
Corollary: On the Internet no one knows you are a dog.
Corollary: On the Internet no one knows you are a dog.
This was ridiculous the first time it came out. It's just as bad now.
care to explain?
Here's what I wrote at the time: So much nonsense in one article. If you think the "bar is so much lower" to becoming a founder then stop whining about being one of the forgotten early employees and get off your ass and start a company for the right reasons: finding a market opportunity and making money from it. If you can't or won't, then you can't expect the rewards.
Early employees are important, and should be given credit and fair payment for their work, but their risk profile is far, far less than the founders and investors. Investors stand to lose their investment (which is an accumulation of work) and the founders can lose money, reputation, and time. In my last business I lost hundreds of thousands of dollars of my own money and five year's 24/7 sweat. Every employee walked away.
Early employees are important, and should be given credit and fair payment for their work, but their risk profile is far, far less than the founders and investors. Investors stand to lose their investment (which is an accumulation of work) and the founders can lose money, reputation, and time. In my last business I lost hundreds of thousands of dollars of my own money and five year's 24/7 sweat. Every employee walked away.
The simple solution to this problem is to enable a new type of sales model for software. The current models are broken and lean toward the investor-founder-operations-developer chain of control, with the investor and founders controlling the revenue. Flipping the model on its head would allow for the revenue to flow directly to the developers, bypassing the chain. I think I may have a solution for this, but it's going to require some infrastructure changes.
For proprietary software, other than per-unit or tier/SaaS, what would be more viable? Artificial scarcity can only be exploited so far, especially with a highly saturated sphere of competition.
Now for free software, where there is zero marginal cost for redistribution and no information restrictions are enforced, there's some experimentation going on with quadratic base pledging (multiple people pledge a low base amount, e.g. 1c, and for each individual the base pledge times the number of pledgers is what is deducted). This is being done by Snowdrift.coop: https://snowdrift.coop/
Now for free software, where there is zero marginal cost for redistribution and no information restrictions are enforced, there's some experimentation going on with quadratic base pledging (multiple people pledge a low base amount, e.g. 1c, and for each individual the base pledge times the number of pledgers is what is deducted). This is being done by Snowdrift.coop: https://snowdrift.coop/
The problem is money. There is no way to magically get money into the hands of the founders and the people that have it (IE: investors), will never make a deal where they won't get a good ROI.
Sell software directly from your own website.
software you write all by yourself.
Lots of coders do this, some are brilliantly successful. The ones that dont make money dont know how to Read The Fine Manual.
For example, SEO is not a black art, it is well documented.
software you write all by yourself.
Lots of coders do this, some are brilliantly successful. The ones that dont make money dont know how to Read The Fine Manual.
For example, SEO is not a black art, it is well documented.
Yes Michael - make something that actually does something useful and is difficult to copy and you can sell it without needing VC money (this is what I do). It won't be easy, but it is very nice not having to answer to anyone else.
On SEO yes you can do it on your own, but it is almost a full time job these days.
On SEO yes you can do it on your own, but it is almost a full time job these days.
> The ones that dont make money dont know how to Read The Fine Manual.
Can you elaborate, do you mean that making money selling software from one's own website is a well understood and replicable process? Not trying to argue, I'm genuinely curious.
Can you elaborate, do you mean that making money selling software from one's own website is a well understood and replicable process? Not trying to argue, I'm genuinely curious.
It used to be a well understood and replicable process. But these days I'm really not so sure that it is either well understood, or replicable. The late 90s are gone and won't be back and selling software got harder, not easier since then unless you sell apps.
"selling software got harder, not easier since then"
Can you elaborate? I'm fairly clueless - I thought services like stripe which streamline payments and Steam that serves as a whole distribution platform would have made software sales (for PC:s) easier.
Can you elaborate? I'm fairly clueless - I thought services like stripe which streamline payments and Steam that serves as a whole distribution platform would have made software sales (for PC:s) easier.
There was a time when everything you did with your computer was an application. Nowadays a very large portion of that work is done with a browser, either for free or ad supported. So the market for licensed software sold to end-users has contracted, and the delivery mechanism (installing downloaded software for your PC) is more and more tainted because of malware and rogue installers.
"For example, SEO is not a black art, it is well documented."
SEO takes a different kind of person. I do both (software design and SEO/marketing) and am pretty successful at it. However, pretty much all developers I know despise anything related to marketing, are really bad at it, or just aren't willing to spend the time learning it.
It's also not "well documented". It's like trying to say that investing in the stock market is "well documented".
SEO takes a different kind of person. I do both (software design and SEO/marketing) and am pretty successful at it. However, pretty much all developers I know despise anything related to marketing, are really bad at it, or just aren't willing to spend the time learning it.
It's also not "well documented". It's like trying to say that investing in the stock market is "well documented".
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This is how we end up with statistics like 27% of founders have mental health issues. Source: http://www.businessinsider.com/austen-heinzs-suicide-and-dep...