The Back to the Future Arbitrage of Silicon Valley(blogmaverick.com)
blogmaverick.com
The Back to the Future Arbitrage of Silicon Valley
http://blogmaverick.com/2014/03/19/the-back-to-the-future-arbitrage-of-silicon-valley-and-what-it-will-take-to-beat-it/
28 comments
So, Cuban is saying Silicon Valley's advantage is the ability to create exits. What's the most common exit path? If you've got the right investor pedigree, it's to flip your company to Google, Facebook, Yahoo or another Sequoia/Accel/Kleiner/Andreessen company. I think that's one of the biggest reasons its difficult to recreate a Silicon Valley elsewhere. SV is a much more incestuous process than the meritocratic one its often portrayed as in the media. Most Sequoia companies don't really "fail" -- they get acqui-hired as a favor/kickback because its better for Sequoia's portfolio and doesn't really impact the acquiring company. In other parts of the country/world where that's not possible, there is a much greater risk for entrepreneurs to start companies around things like social networking apps. Also, kind of ironic to note that Cuban made most of his money by selling his company to Yahoo at the peak of the first internet bubble. A few years later, his company effectively ceased to exist -- not exactly what I'd call creating long-term value.
I'm amused by it. It's a transfer of wealth from shareholders of those companies to founders and VCs. These are also the companies with dual class shares designed to keep control in the founders' hands. They all say it's to be able to focus on the long-term, but really it has bred empire building and poor stewardship of the shareholder's capital. As a result, their interests are less aligned with shareholders' compared to if all shares had the same voting rights.
An exception to this is Apple. They have one class of shares and management have been conservative stewards for the life of the company. They never make large acquisitions, which limits the opportunity for destruction of shareholder value, and all acquisitions are made with the purpose of enhancing a product or some other core of the business. It's in the company's culture to have organic growth. They either have it or they flounder.
An exception to this is Apple. They have one class of shares and management have been conservative stewards for the life of the company. They never make large acquisitions, which limits the opportunity for destruction of shareholder value, and all acquisitions are made with the purpose of enhancing a product or some other core of the business. It's in the company's culture to have organic growth. They either have it or they flounder.
"Also, kind of ironic to note that Cuban made most of his money by selling his company to Yahoo"
An irony yes but doesn't detract at all from the point that he is making.
One can recognize that something is wrong but still play the game and take advantage of the fact that others play by a certain set of rules.
Cuban's perspective comes from his interfacing with many entrepreneurs and he sees the zeitgeist in interactions with people seeking funding.
If you've ever watched Shark Tank and have seen him grimace you would understand where he's coming from.
An irony yes but doesn't detract at all from the point that he is making.
One can recognize that something is wrong but still play the game and take advantage of the fact that others play by a certain set of rules.
Cuban's perspective comes from his interfacing with many entrepreneurs and he sees the zeitgeist in interactions with people seeking funding.
If you've ever watched Shark Tank and have seen him grimace you would understand where he's coming from.
He makes an assertion that isn't true. That it's just as possible to raise money somewhere else other than Silicon Valley. Is it possible? Yes. Is it as easy/fast/convenient? Not even close. I've tried doing a startup in Michigan. Conversations with investors lasted months and they still wouldn't commit. In the valley, you can get a yes after meeting 2. Can you raise money outside of SV? Yes (in some places easier than others) but if you have to spend a bunch of your time on investor meetings instead of on your customers, it just makes it that much harder to grow your business. Silicon Valley also provides other intangibles that other locations don't (eg lots of early adopters that will give you feedback on your product, easy access to talent, etc...). My opinion is that it's still the best place to do a startup. (Granted I've only tried in Michigan before)
Ohh and the exit scenario that he mentions, this is pretty accurate from my observations and SV/VCs here are really good at this. A lot of personal relationships that help facilitate this.
Ohh and the exit scenario that he mentions, this is pretty accurate from my observations and SV/VCs here are really good at this. A lot of personal relationships that help facilitate this.
Your assertion that people can't raise money easily elsewhere is wrong. Just because you had one singular data point about your own experience does not create a truth, nor does my experience in raising a large-sized convertible note in just five weeks with only four investor meetings in the deep south make that a truth either.
Then again, I had already made most of those investors good money, and have friends who are professional fundraisers. Your connectedness counts everywhere. Those SV intangibles are largely meaningless to my business, as there are more of my kind of customers in my local city than in SV, a lot more.
Then again, I had already made most of those investors good money, and have friends who are professional fundraisers. Your connectedness counts everywhere. Those SV intangibles are largely meaningless to my business, as there are more of my kind of customers in my local city than in SV, a lot more.
He didn't say you "can't" raise money elsewhere, just that it is more difficult. Are you arguing that it is just as easy to raise money elsewhere as it is in SV?
"He makes an assertion that isn't true. That it's just as possible to raise money somewhere else other than Silicon Valley. Is it possible? Yes. Is it as easy/fast/convenient? Not even close."
His assertion was based on his personal experience, as further detailed. For some of us, it is far easier to raise money locally than in Silicon Valley. Therefore, any statement which states it is categorically "not even close" without taking into account the target for the statement and their given situation must therefore be false.
Furthermore, the assertion of the author he cited was that it's just as possible to raise money, which is the statement he derides as false, and then categorizes his own statement of false by saying that while the author is correct, that it's "just as possible," it's "not as easy," which was not the assertion of the posts author.
His assertion was based on his personal experience, as further detailed. For some of us, it is far easier to raise money locally than in Silicon Valley. Therefore, any statement which states it is categorically "not even close" without taking into account the target for the statement and their given situation must therefore be false.
Furthermore, the assertion of the author he cited was that it's just as possible to raise money, which is the statement he derides as false, and then categorizes his own statement of false by saying that while the author is correct, that it's "just as possible," it's "not as easy," which was not the assertion of the posts author.
If it isn't, it certainly is getting closer every year. There are thousands of examples. Groups like Austin Ventures, Foundry in Boulder, and many others are out there writing checks. Thousands of angel investors exist in literally every city.
I've raised quite a bit of money in Colorado, and it matches my experiences in the valley.
I think Cuban, however, is spot on. There remains a very persistent advantage to Valley money. It more often than not, buys you an exit. I'm currently on the board for a company that is attempting to exit, and we're having a hell of a time connecting with buyers within the SV ecosystem.
I've raised quite a bit of money in Colorado, and it matches my experiences in the valley.
I think Cuban, however, is spot on. There remains a very persistent advantage to Valley money. It more often than not, buys you an exit. I'm currently on the board for a company that is attempting to exit, and we're having a hell of a time connecting with buyers within the SV ecosystem.
It's who you talk to, where and how. Probably no bank in Palo Alto will invest, but they may consider a loan with collateral.
His thesis that Silicon Valley is good at exits, but unremarkable at capital raises seems to be an alternate reality to me.
Hard data on raises is everywhere - see for example the PWC moneytree report. The Valley has consistently done as much as the rest of the country combined (approx.) for decades now.
Exits on the other hand are fuzzier and tend to come from everywhere. IPOs for example are really more made in New York than the Valley if you think about it. Acquisitions are more Valley-centric only because tech companies tend to acquire other tech companies, and the Valley has more of them.
Hard data on raises is everywhere - see for example the PWC moneytree report. The Valley has consistently done as much as the rest of the country combined (approx.) for decades now.
Exits on the other hand are fuzzier and tend to come from everywhere. IPOs for example are really more made in New York than the Valley if you think about it. Acquisitions are more Valley-centric only because tech companies tend to acquire other tech companies, and the Valley has more of them.
What Silicon Valley does better than anyone is create
exits. They know how to get people who they have made
money for to turn over a lot of that money to buy the
companies they have invested in. They know how to put on a
show to get a company to an IPO. They know how to go out
and get hundreds of millions of dollars to bridge companies
with 10s of millions in revenues to their IPO and more
importantly to make sure the IPO happens.
https://www.quora.com/What-was-Broadcast.com
Pretty sure everyone here knows how Mark Cuban became a billionaire. Who better to speak on the topic accordingly?
I think this is Cuban's way of saying "Hold on, I see now that compared to the exits we are heading towards, the valuations are not to big." Here's the problem with that type of thinking - we can always readjust our valuation expectations to be in line with increased valuations. Every bubble does that. It becomes the 'new normal'. But it's still not necessarily true. Regardless of SV's success at crafting exits, valuations might still be too high. Both statements can be true.
This reads like a satire considering Cuban made his money doing literally everything in that article, except the Stanford bit. I spent the whole article waiting for the point where he would say, "just kidding, don't hate the player, hate the game."
This is just your typical rich guy who makes a boatload of money, turns around to say, "money isn't everything," then hops into his G5 airplane to check if his investments have yielded 10x. Hypocritical BS
This is just your typical rich guy who makes a boatload of money, turns around to say, "money isn't everything," then hops into his G5 airplane to check if his investments have yielded 10x. Hypocritical BS
That doesn't invalidate his argument, though. If anything, you could argue that he's more qualified to describe these things, because he's played the game a few times. He's been on the inside. He knows the moves and the motivations.
One can be a hypocrite and still be correct. FWIW, I don't see anything along the lines of "money isn't everything" in his post.
One can be a hypocrite and still be correct. FWIW, I don't see anything along the lines of "money isn't everything" in his post.
in this post, he's telling people not to chase big exits, yet elsewhere, he is spotted aggressively flossing his big exit money: http://m.youtube.com/watch?v=ITkYtwmM-OU&ctp=CAIQpDAiEwj...
Hollywood's practice of using independent talent is a better model for technologists than the standard corporate employee/employer relationship.
It allows more flexibility & creative potential. It keeps Hollywood in a leadership role over many fashion-driven industries.
As the technology industry becomes more about abstraction, it also assumes more characteristics of a fashion-driven industry. Having independent creators will only increase innovation and market liquidity.
It allows more flexibility & creative potential. It keeps Hollywood in a leadership role over many fashion-driven industries.
As the technology industry becomes more about abstraction, it also assumes more characteristics of a fashion-driven industry. Having independent creators will only increase innovation and market liquidity.
Lol @ Color reference. Whether WhatsApp, SnapChat are in league with Broadcast.com, The Learning Company, Geocities or Exite is debatable.
I'm still trying to wrap my head around how Groupon justifies any valuation considering how much they fritter away on staff T&R (flying non-local sales staff to other cities to spend 3 hours with one restaurant owner).
I'm still trying to wrap my head around how Groupon justifies any valuation considering how much they fritter away on staff T&R (flying non-local sales staff to other cities to spend 3 hours with one restaurant owner).
They know how to get people who they have made money for to turn over a lot of that money to buy the companies they have invested in.
I'm just trying to parse this. Is he saying that VCs earn money for their LPs, and then turn around and sell portfolio companies to the same LPs?
I'm just trying to parse this. Is he saying that VCs earn money for their LPs, and then turn around and sell portfolio companies to the same LPs?
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sounds like someone's having a hard time investing and hiring.
So, what's propping all of this up is the immense size of a typical startup acquisition. These acquisitions are typically priced at $5 million per engineer for an acqui-hire, and more if there's an actual product. These numbers are consistent to scale: for an established, public tech company to have a market cap of under $1 million per employee is unsuccessful.
Think about that. A mere relationship (which she can end at any time) with an average engineer (most startup engineers aren't anything special, as startup success these days has more to do with marketing and sales than technical excellence) or technical person is worth several million dollars. Why?
Companies like Yahoo buy startups at a panic price: several millions of dollars per head. That's the price of mostly mediocre talent. Also, acquisitions are fraught with peril. Good people tend to bounce and bad people tend to stay. Huge tech companies still do them. Why? Because their middle management filters are so broken they can't recognize talent at the bottom. Engineers who are just good enough to support a half-decent sales/product teem are, along with that sales team, valued at $2-5 million per head.
And we still don't think of ourselves as exploited, when we suffer under closed allocation for a comparative pittance?
These startups are an attempt to capture the immense surplus value that we (especially the top 10% of us) create. They used to enrich... engineers and makers, as well as investors. They now deliver our surplus value to... friends of investors (hired in as executives, or made founders) as well as investors.
Think about that. A mere relationship (which she can end at any time) with an average engineer (most startup engineers aren't anything special, as startup success these days has more to do with marketing and sales than technical excellence) or technical person is worth several million dollars. Why?
Companies like Yahoo buy startups at a panic price: several millions of dollars per head. That's the price of mostly mediocre talent. Also, acquisitions are fraught with peril. Good people tend to bounce and bad people tend to stay. Huge tech companies still do them. Why? Because their middle management filters are so broken they can't recognize talent at the bottom. Engineers who are just good enough to support a half-decent sales/product teem are, along with that sales team, valued at $2-5 million per head.
And we still don't think of ourselves as exploited, when we suffer under closed allocation for a comparative pittance?
These startups are an attempt to capture the immense surplus value that we (especially the top 10% of us) create. They used to enrich... engineers and makers, as well as investors. They now deliver our surplus value to... friends of investors (hired in as executives, or made founders) as well as investors.
Would you say most engineers are used to discussing compensation in annual terms, while buyouts are usually computed in forward-projected earnings terms, anywhere from 3-8 years for most small buyouts depending upon various factors? If so, then a $2-5M per head figure works out to $667K-1.67M per engineer per year for a 3-year projection, and $1.67M-625K per engineer per year for an 8-year projection. Even factoring in the overhead costs (an additional 50-100% bump to the annual figure), that is still a healthy amount of surplus capital in the picture that engineers should keep in mind when getting recruited, and should be negotiating for in prudently-structured stock grant terms if not in cash.
So it isn't $acquihire_price_per_engineer - ( $my_annual_compensation_pkg + $overhead ) = OMFG!, but it still pencils out to a healthy amount per year anyone who is a principal contributor should be aware of.
So it isn't $acquihire_price_per_engineer - ( $my_annual_compensation_pkg + $overhead ) = OMFG!, but it still pencils out to a healthy amount per year anyone who is a principal contributor should be aware of.
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