The Next 10 Years Will Be Great For Both Founders And VCs(techcrunch.com)
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The Next 10 Years Will Be Great For Both Founders And VCs
http://techcrunch.com/2011/05/08/the-next-10-years-will-be-great-for-both-founders-and-vcs/
15 comments
Capital used to be a source of competitive advantage: capital was needed for success, so having access to it was an advantage. I think Google's server farms distributed around the world fall into this category (they enable lower latency, faster responses).
But there are many other sources of competitive advantage, such as a network effects (but this didn't save MySpace) Perhaps the two most important ones are marketing (both how well known it is when growing and its PR image once established) and continuous improvement (facebook keeps adding features). If you are ahead, and you keep improving, then it's difficult for competitors to catch up.
It's seems odd, but this means that a perfect product is one of the worst things that can happen to you. Since it's perfect, you can't improve it, and competitors will catch up. It's far better to have a product that is valuable to customers, but if it was a bit better, they'd value it even more.
Another terrible thing that can happen is that, although you can improve the product, customers don't care about that improvement. Like a man dying of thirst in the desert, he'd like some water; but at a some point he'll say, "that's enough", and shift his concern to something else (e.g. faster google responses are valued, but at some point, the latency will be small enough that people won't be annoyed by it, then they won't notice it, then they won't even be able to perceive it.)
But there are many other sources of competitive advantage, such as a network effects (but this didn't save MySpace) Perhaps the two most important ones are marketing (both how well known it is when growing and its PR image once established) and continuous improvement (facebook keeps adding features). If you are ahead, and you keep improving, then it's difficult for competitors to catch up.
It's seems odd, but this means that a perfect product is one of the worst things that can happen to you. Since it's perfect, you can't improve it, and competitors will catch up. It's far better to have a product that is valuable to customers, but if it was a bit better, they'd value it even more.
Another terrible thing that can happen is that, although you can improve the product, customers don't care about that improvement. Like a man dying of thirst in the desert, he'd like some water; but at a some point he'll say, "that's enough", and shift his concern to something else (e.g. faster google responses are valued, but at some point, the latency will be small enough that people won't be annoyed by it, then they won't notice it, then they won't even be able to perceive it.)
The thing is that this article and the Sequoia "RIP Good Times" slideshow are actually both kind of right.
This "recovery" is completely fragile and we will see what a real Great Depression 2.0 looks like after the dollar collapses. The final trigger could be Greece's pending sovereign bankruptcy, the popping of the tuition bubble, or the S&P downgrade of treasuries. Each of these is absolutely going to happen, Tim Geithner's assurances notwithstanding, though the timeframe is not certain.
So in this sense Sequoia's talk was right, even though they didn't properly articulate the actual upstream driver of the collapse in their slideshow (namely the push for massively expanded minority homeownership in the 2000s).
However, Quigley is also right about his particular point: that we are going to see a return to private companies and a retreat from "going public". Facebook is only the beginning.
While "going public" is thought of as the apotheosis of capitalism, it's really an injection of democracy into an otherwise capitalistic system. All the things people think of as deficiencies of capitalism -- including shortsighted management on a quarterly basis, financial manipulation of stocks, and the like -- are actually problems of democracy, not capitalism.
Think about how dumb VCs can be. Now think about how dumb a braying mob can be. You should be extremely reluctant to sell control of your enterprise to that braying mob. A well run business is about elitism, not democracy, as not all votes can or should count equally -- exhibit A being Steve Jobs.
Currently, US government regulations force disclosure requirements on companies of a certain size, which is why many (but not all) of that size decide to go public.
However, as more and more companies stay private, and as we have a complete collapse in faith in government bonds, we find that a very interesting thing may happen: stocks and bonds, the tools of Wall Street, may be radically reduced in importance.
This will have a tremendous salutary effect as the primary way to create wealth will be to actually start a business and sell a product. This is really the key point that Quigley is making.
This has to happen at some point because the risk-adjusted returns you can get on Wall Street are still higher than entrepreneurship. Once that changes, things will change for the better.
This "recovery" is completely fragile and we will see what a real Great Depression 2.0 looks like after the dollar collapses. The final trigger could be Greece's pending sovereign bankruptcy, the popping of the tuition bubble, or the S&P downgrade of treasuries. Each of these is absolutely going to happen, Tim Geithner's assurances notwithstanding, though the timeframe is not certain.
So in this sense Sequoia's talk was right, even though they didn't properly articulate the actual upstream driver of the collapse in their slideshow (namely the push for massively expanded minority homeownership in the 2000s).
However, Quigley is also right about his particular point: that we are going to see a return to private companies and a retreat from "going public". Facebook is only the beginning.
While "going public" is thought of as the apotheosis of capitalism, it's really an injection of democracy into an otherwise capitalistic system. All the things people think of as deficiencies of capitalism -- including shortsighted management on a quarterly basis, financial manipulation of stocks, and the like -- are actually problems of democracy, not capitalism.
Think about how dumb VCs can be. Now think about how dumb a braying mob can be. You should be extremely reluctant to sell control of your enterprise to that braying mob. A well run business is about elitism, not democracy, as not all votes can or should count equally -- exhibit A being Steve Jobs.
Currently, US government regulations force disclosure requirements on companies of a certain size, which is why many (but not all) of that size decide to go public.
However, as more and more companies stay private, and as we have a complete collapse in faith in government bonds, we find that a very interesting thing may happen: stocks and bonds, the tools of Wall Street, may be radically reduced in importance.
This will have a tremendous salutary effect as the primary way to create wealth will be to actually start a business and sell a product. This is really the key point that Quigley is making.
This has to happen at some point because the risk-adjusted returns you can get on Wall Street are still higher than entrepreneurship. Once that changes, things will change for the better.
Through all the FUD you raise some good points, but perhaps tone down a bit of the apocalyptic rhetoric?
we will see what a real Great Depression 2.0 looks like after the dollar collapses
Unfounded and inflammatory.
Unfounded and inflammatory.
Any currency collapse is never an IF, only a WHEN... however, indeed this would indicate the end of a depression, not its start. Meaning after any kind of collapse, economic activity is bound to pick up... hit the bottom and the only way is up.
This article seems to overlook the fact that even if Amazon, Ebay, Microsoft had a very small valuation at the time of their IPO, the founders, early employees, and probably some VCs held on to the stock for a long time after the IPO; thus all the founders became billionaires.
I think what he wants to say is that the next 10 years will be better for VCs (because they will wait much longer to exit than before, being able to get 500X returns). For founders, it will actually be the same.
I think what he wants to say is that the next 10 years will be better for VCs (because they will wait much longer to exit than before, being able to get 500X returns). For founders, it will actually be the same.
As far as the tech world is concerned, I think the next 10+ years will be great for hackers. Costs will keep going down and there will be more opportunities in the internet, more leverage for people who actually know how to build and execute.
Which could be bad for VC's, who are already throwing money at companies like color with the landscape fairly void of companies that need big VC scale investments.
I think that is a great thing, more companies creating more value for founders without having to give away to much equity to outside investment.
I think that is a great thing, more companies creating more value for founders without having to give away to much equity to outside investment.
I agree. This economy also isn't getting any prettier anytime soon either... it's going to be tough for investors, and it's going to be esp tough for non-technical founders with just an idea, I think.
This is why I suspect Yuri Milner shrewdly linked up with Y Combinator early on, he saw this coming. Small, nimble teams of hackers will survive and win.
This is why I suspect Yuri Milner shrewdly linked up with Y Combinator early on, he saw this coming. Small, nimble teams of hackers will survive and win.
When you need to present a powerpoint to prove that we are not in a bubble, we are in a bubble.
This article is proof that there is something wrong in the system. The article mirrors those "an era of never ending growth" posted by Jon Katz et al during the first boom.
The first boom was a game of financial geeks. The boom was a way for smart people who are into financials to move money from one set of hands into their own hands. The computer nerds got played by financial nerds - value was not really destroyed, it just relocated into the pockets of a few saavy guys.
There are signs that the same thing is happening again, but this time on a different scale. Certain big time investors make their money from playing mathematical games on the financial market. They are betting low and selling high. Those same investors have seen another opportunity to do such trades, but betting on these so called 'startups'. There is a certain category of financial wizard - once you see them jumping into an industry, it means that the mathematics has gotten complicated enough that they can use their knowledge advantage to move money from one set of hands into the other.
The rumours of a boom are not unfounded. There is a financial game being played, but it's not a penny game like the first one, this time it's a premium game. They are avoiding the mass of last time and moving bigger chunks of money around.
People are going to lose money, but I don't think those people willl be Joe Ordinary this time. I think it's going to be a bunch of medium-wealthy people, who will buy into the claims of extra-ordinary returns.
In the end, the same thing will happen - the cycle of money being pushed around and part of it going to the people in charge of the system is going to stop, and once more people will lose money.
However, I doubt the outcry will be particularly large this time, because there will be less people affected, even if the sums could be similar.
Where there is a lot of money moving around, there are people trying to get that money to come to them. Those people are the same people 'controlling' the eco-system.
Watch the edges of any movement. When you see the 'uncool' people dropping out of the game, then there is something wrong in the middle. Watch the cycle of money - when investors are giving money to a company, which then takes that money and buys another company who also received money from the same company, then it means that people are using cyclical methods to 'invest' other peoples money, and then get themselves paid out.
There is no innovation problem - new and good products are being created everyday. That's fine. The boom lies in this financial layer that the financial geeks are building on top of the natural process of innovation - and the methods that are being used are there to benefit the companies participating in the financing.
The first boom was a game of financial geeks. The boom was a way for smart people who are into financials to move money from one set of hands into their own hands. The computer nerds got played by financial nerds - value was not really destroyed, it just relocated into the pockets of a few saavy guys.
There are signs that the same thing is happening again, but this time on a different scale. Certain big time investors make their money from playing mathematical games on the financial market. They are betting low and selling high. Those same investors have seen another opportunity to do such trades, but betting on these so called 'startups'. There is a certain category of financial wizard - once you see them jumping into an industry, it means that the mathematics has gotten complicated enough that they can use their knowledge advantage to move money from one set of hands into the other.
The rumours of a boom are not unfounded. There is a financial game being played, but it's not a penny game like the first one, this time it's a premium game. They are avoiding the mass of last time and moving bigger chunks of money around.
People are going to lose money, but I don't think those people willl be Joe Ordinary this time. I think it's going to be a bunch of medium-wealthy people, who will buy into the claims of extra-ordinary returns.
In the end, the same thing will happen - the cycle of money being pushed around and part of it going to the people in charge of the system is going to stop, and once more people will lose money.
However, I doubt the outcry will be particularly large this time, because there will be less people affected, even if the sums could be similar.
Where there is a lot of money moving around, there are people trying to get that money to come to them. Those people are the same people 'controlling' the eco-system.
Watch the edges of any movement. When you see the 'uncool' people dropping out of the game, then there is something wrong in the middle. Watch the cycle of money - when investors are giving money to a company, which then takes that money and buys another company who also received money from the same company, then it means that people are using cyclical methods to 'invest' other peoples money, and then get themselves paid out.
There is no innovation problem - new and good products are being created everyday. That's fine. The boom lies in this financial layer that the financial geeks are building on top of the natural process of innovation - and the methods that are being used are there to benefit the companies participating in the financing.
wealth is not zero sum. wealth is created and destroyed by the actions of individual and group economic activity all the time. so the popular refrain that "value was not really destroyed, it just relocated into the pockets of a few saavy guys." is not true. the market rewards correctly predicting trends in future valuation. that valuation fluctuates due to psychology as well as fundamentals means that the game will contain elements of deception, but that doesn't alter the underlying economics.
I believe that OP is implying that some markets sometime do not create value. e.g. Ponzi Scheme.
>> The computer nerds got played by financial nerds - value was not really destroyed, it just relocated into the pockets of a few saavy guys.
I'm not 100% sure which boom, dotcom or realestate, but both destroyed significant amounts of wealth. When money is spent building companies or houses that aren't needed then wealth is destroyed, those people could have been doing something to maintain or increase the amount of wealth. If you spend 100MM on 10MM company then you destroyed wealth, if you spend 10MM on a 1MM house you've destroyed wealth - those resource could have been put to better use satisfying other's needs and wants.
I'm not 100% sure which boom, dotcom or realestate, but both destroyed significant amounts of wealth. When money is spent building companies or houses that aren't needed then wealth is destroyed, those people could have been doing something to maintain or increase the amount of wealth. If you spend 100MM on 10MM company then you destroyed wealth, if you spend 10MM on a 1MM house you've destroyed wealth - those resource could have been put to better use satisfying other's needs and wants.
Why do you think goldman sachs is involved with facebook, same reason but larger scale than the investments in ycombinator recently.
Actually I think there is a far greater bubble in many other investments than VC.
US government bonds and paper currency for example.
The US government pays 3.6% interest only for 10 year bonds and the government has huge debt, increasing each year.
However I don't plan to invest the majority my money in start ups or VC funds for a few reasons: 1. It's extremely low cost to start up an Internet company and the barrier to entry is not money it's expertise 2. There are safer opportunities in real estate with 25% returns 3. I don't have access to the right networks to find the next twitter/ Facebook/ drop box etc. 4. The valuations are way too high (for my liking)
I would much prefer to invest in start ups as it's more fun, but for me it's too difficult to find a good business to invest in.
US government bonds and paper currency for example.
The US government pays 3.6% interest only for 10 year bonds and the government has huge debt, increasing each year.
However I don't plan to invest the majority my money in start ups or VC funds for a few reasons: 1. It's extremely low cost to start up an Internet company and the barrier to entry is not money it's expertise 2. There are safer opportunities in real estate with 25% returns 3. I don't have access to the right networks to find the next twitter/ Facebook/ drop box etc. 4. The valuations are way too high (for my liking)
I would much prefer to invest in start ups as it's more fun, but for me it's too difficult to find a good business to invest in.
"Yet, at the time of its IPO, Microsoft’s Windows was already the world’s dominant operating system."
Is it a small mistake? because the dominant OS was MS DOS not Microsoft Windows.
Also, can you compare Facebook, Zynga and Twitter to Cisco, Microsoft, Google and VMWare ?
Is it a small mistake? because the dominant OS was MS DOS not Microsoft Windows.
Also, can you compare Facebook, Zynga and Twitter to Cisco, Microsoft, Google and VMWare ?
Hysteria about the financial sector "taking money" out of tech is unfounded paranoia.
The financial sector moves money from idle hands amongst the rich to working hands.
Investors lose access to their cash for an agreed amount of time, and risk losing it altogether. For that risk, they are compensated by some amount of return.
This is not an immoral thing. This is the mechanism that allows people with great ideas and skills to build businesses.
If you don't like capitalism, then go sample the delights of communist North Korea.
Capitalism affords us an excellent quality of life, full of opportunity. Don't take it for granted.
The financial sector moves money from idle hands amongst the rich to working hands.
Investors lose access to their cash for an agreed amount of time, and risk losing it altogether. For that risk, they are compensated by some amount of return.
This is not an immoral thing. This is the mechanism that allows people with great ideas and skills to build businesses.
If you don't like capitalism, then go sample the delights of communist North Korea.
Capitalism affords us an excellent quality of life, full of opportunity. Don't take it for granted.
>Here is the important, and game-changing, point: in order to participate in the great wealth creation taking place in this and future technology cycles, you will have to be a founder, an early employee or a private investor. The so-called easy money will be earned before a company goes public. This is a radical shift from earlier technology cycles.
Things change when a company goes public; especially so for technology companies.
Prices fluctuate.
I bet many people and institutions will make money (and lose money) from these new companies going public, post IPO.
Things change when a company goes public; especially so for technology companies.
Prices fluctuate.
I bet many people and institutions will make money (and lose money) from these new companies going public, post IPO.
I received spam from you on my email, scraped from HN. Please don't do that.
One never knows. It's like predicting the stock market for the next 10 years. If you really knew, you'd not be writing articles, but making yourself wicked rich.
Anytime is a good time to be a founder. There's always a need for something better. Technology and use of technology is always evolving.
Anytime is a good time to be a founder. There's always a need for something better. Technology and use of technology is always evolving.
That's it. I'm calling the top of the bubble in the next six months.
Selection bias much? I know some earlier dot coms that went public and allowed the VCs and early employees to capture 10x the terminal value of the company.
And less than three years ago we heard that the next decade would be very tough, from Sequoia no less. The hunt for suckers is on.
Author's points:
1.) proliferation of Internet access
2.) the rise of the hedge funds
3.) global marketplace
therefore, the glass is half full.
1.) Yes, the internet usage penetration rate is still not at 100%, even for the advanced countries. There are still alot of room to grow. However, to start new companies in the current environment and have it go big is very hard. The reason is that internet market itself has matured, and there are plenty of monopolies already. Did you see any new companies blowing up in the last year, even though VC/angel funding have increased dramatically? No, because Facebook, Google, Apple, Zynga, Amazon will either move into the market just as quick, or buy the company out for measly millions before they get big. Look at Zynga dominating the social games, copying competitor's concept, and crushing them. Look at Google snapping up talents and companies left and right, in areas beyond search. Look at Facebook moving into Foursquare, Groupon and Quora's territory. These modern age internet monopolies are scary, having the reach of giants but are as nimble as a ninja, able to focus thousands of programmers onto a market overnight.
2.) Hedge funds are actually decreasing in size, not increasing. [1] In 2011, the hedge funds held a total $1.29 trillion, down from 2008 with $1.93 trillion, down 30%. Even though the stock market is back to its near 2008 high.
3.) Yes, global marketplace. BRIC (Brazil, Russia, India, China) will allow companies to grow even further. Look at China, overtaking US soon as the world's largest economy. Oh wait....Facebook/Twitter/Zynga are banned in China. Oops. And Russia has alot of Facebook/Groupon/Twitter clones too. Doubt the Russian government will let US companies get their hands on Russian people's private information if they get big. Brazil and India....too poor. No way they have money to spend frivilous money on farmville items and facebook ads. Yeah, this globalization thing isn't looking so hot.
Not to mention, we're in the start of a global economic depression. The next 10 years, we will see the following:
- China's shadow banking blows up
- Japan finally succumbs to its own democraphics, and along with losing northeast as its prime food producer and the nuclear crisis and the emergence of other asian exporters, suffers a -5% GDP every year.
- Greece, Portugal, Ireland will leave euro or default, leading to a massive wave of other countries doing the same thing, leading to euro failing and European banks suffering 70-80% loss on loans.
- US dollar resume its decline, and as more countries shift its uses/accumulation of dollar to other safe currencies, resulting in a dollar hyperinflation scenario. Which will be great for US government so they can get out of their $70 trillion obligations to social security/medicare, although US banks have $200 trillion shadow derivatives that will bankrupt them.
So, the next 10 years will be horrible for both founders and VCs
[1] http://en.wikipedia.org/wiki/Hedge_fund#Industry_size
1.) proliferation of Internet access
2.) the rise of the hedge funds
3.) global marketplace
therefore, the glass is half full.
1.) Yes, the internet usage penetration rate is still not at 100%, even for the advanced countries. There are still alot of room to grow. However, to start new companies in the current environment and have it go big is very hard. The reason is that internet market itself has matured, and there are plenty of monopolies already. Did you see any new companies blowing up in the last year, even though VC/angel funding have increased dramatically? No, because Facebook, Google, Apple, Zynga, Amazon will either move into the market just as quick, or buy the company out for measly millions before they get big. Look at Zynga dominating the social games, copying competitor's concept, and crushing them. Look at Google snapping up talents and companies left and right, in areas beyond search. Look at Facebook moving into Foursquare, Groupon and Quora's territory. These modern age internet monopolies are scary, having the reach of giants but are as nimble as a ninja, able to focus thousands of programmers onto a market overnight.
2.) Hedge funds are actually decreasing in size, not increasing. [1] In 2011, the hedge funds held a total $1.29 trillion, down from 2008 with $1.93 trillion, down 30%. Even though the stock market is back to its near 2008 high.
3.) Yes, global marketplace. BRIC (Brazil, Russia, India, China) will allow companies to grow even further. Look at China, overtaking US soon as the world's largest economy. Oh wait....Facebook/Twitter/Zynga are banned in China. Oops. And Russia has alot of Facebook/Groupon/Twitter clones too. Doubt the Russian government will let US companies get their hands on Russian people's private information if they get big. Brazil and India....too poor. No way they have money to spend frivilous money on farmville items and facebook ads. Yeah, this globalization thing isn't looking so hot.
Not to mention, we're in the start of a global economic depression. The next 10 years, we will see the following:
- China's shadow banking blows up
- Japan finally succumbs to its own democraphics, and along with losing northeast as its prime food producer and the nuclear crisis and the emergence of other asian exporters, suffers a -5% GDP every year.
- Greece, Portugal, Ireland will leave euro or default, leading to a massive wave of other countries doing the same thing, leading to euro failing and European banks suffering 70-80% loss on loans.
- US dollar resume its decline, and as more countries shift its uses/accumulation of dollar to other safe currencies, resulting in a dollar hyperinflation scenario. Which will be great for US government so they can get out of their $70 trillion obligations to social security/medicare, although US banks have $200 trillion shadow derivatives that will bankrupt them.
So, the next 10 years will be horrible for both founders and VCs
[1] http://en.wikipedia.org/wiki/Hedge_fund#Industry_size
Competition has a way of adjusting to shared advantages - how will that play out here? I think it will mean that the key ingredients will become more valuable. And here, that's founders (technical ability to make things happen; business vision to know what is worth doing and how to adjust to it; and of course intelligence, flexibility and stamina) and connections (for promotion; integration with other services etc).
I guess the "Yuri bonus" is just the beginning of this. Accurate gatekeepers, like YC, that can recognize the above qualities in founders (and have connections), will also become more valuable. A key advantage YC has at this point is experience in recognizing these qualities, having gone through the cycle severals, which enables trial-and-error learning. Even if another group had more raw talent at the task, YC would be very hard to beat, because so much of success is practical know-how that only comes with exposure to the details of reality.