It's an interesting exercise to ask what the thesis of this article is. It's not that all founders who take VC are idiots. He's not saying that Larry & Sergey are idiots-- and implicitly that he's smarter than them. He hedges pretty conspicuously there. All he's saying is that some VCs are bad. But that is hardly news. Every line of work has some people who are bad.
Imagine the corresponding article about roofers. It would be called "Idiot Homeowners," and say, as if it were some great discovery, that some roofers are bad-- that they overcharge you, and then do bad work as well.
"Founded in 1998, The Venture Company is a catalyst for disruptive innovation; helping entrepreneurs, corporations and investors innovate."
I noticed a similar article yesterday. I'm skeptical that Hacker News will weather the upcoming storm once all of the professional-entrepreneur-advisers decide to start drumming up clients here.
- Exorbitant loss of upside
Great entrepreneurs are known for their passion to pursue their dreams at virtually any cost, and sub-prime VCs smell their blood and desperation. Those companies become owned by VCs quickly and because of the investors' lack of relevant operating experience yields a further deflation of the valuation of the company. We've seen many companies with end-game founder stock way below 5%, which is unlikely to become life-changing. So, why would you take the scrutiny of the CEO job with that outcome in mind?
Always think about that, is it better to own 100% of a company worth 10 million bucks or 5% of a company worth 200 million? I would rather own completely the smaller business and have fewer people to answer to and focus on a more niche (often times more interesting) problem.
Except that if you own 5% of a company worth 200 million you should be able to quit and walk away with 10 million (for the standard definition of "own" and "worth").
If you own a company worth 10 million you can't really quit. If you sell it, chances are that the acquiring company will want you around for years so you'll be in the above situation but with golden handcuffs.
You say that if you sell a 10MM company, chances are you'll be handcuffed to the acquirer. This seems like pure supposition on your part. I know plenty of people who wound up handcuffed to their VC-backed team, due to vesting, incentive packages issues after shatteringly bad valuations, or just terms and conditions of the deal.
The same forces seem to be at play in the 200MM case as in the 10MM case, with the significant difference that in the 200MM case, the interests of the board aren't aligned with the interests of the founders.
This is all a big moot point, of course, because you aren't going to build a 200MM company.
It's not supposition, I'm speaking from experience. For a tech startup, 10M is a price point at which you have a small team and a product with a few man-years of development behind it. Acquiring the product without the team is only worthwhile when the product is a brand. Otherwise, the team/product combinmation is what gives the company most of that value.
To name one example: in 1999 my company paid $13M for a company with 11 people, most of them developers. The company failed to offer them an interesting package so they quit after the acquisition. A team on our side was left to deploy the software. After a few weeks we decided it would be easier to develop the same functionality from scratch.
On the other hand, the assumption was that you 'owned' 5% of the 200M company. If you are handcuffed, then you own less. If you owe the bank 70% of the value of your house, only 30% is yours. Same with vesting.
I respect your experience, but I don't understand how your example has anything to do with $13MM vs. $200MM. In neither case is the CTO, VP/E, or MTS more or less necessary to the acquiring company. You can "own" 5% or 100% of 200MM, but if an acquirer thinks they need you to execute on the acquisition, they're going to keep you, right?
The idea is that if you own 5% of a company worth 200M and you quit, the remaining 95% ownership of the company cares enough about it that they will replace you and move on. In this scenario there is no acquisition, and you walk away without making the company lose any significant value.
I've seen that happen: one of the fully vested founders of the company I worked for left on a sabbatical. After six months he decided he didn't want to come back. By then all his functions had been taken over by other people. He sold some of his stock, kept the rest and went back to grad school.
The point is not so much the size as the fact that you can walk away more easily if you own a small fraction of a company without causing a significant drop in value.
It depends on how you manage it -- there are people who chain themselves to the business, but if the business is really worth $10mm (and not just because of inflated hope, let's say it has $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time, once you've instilled a good operating culture.
> $2-3mm in sales and maybe $500k-$1mm in ebitda) you can bring in operators who, when smartly recruited, take a huge amount of stress off the founder and allow you to run the business part time
That's just barely big enough to go part time.
Folks who can competently run such biz aren't cheap - they're at least $200k (fully burdened), taking a significant fraction of the $500k-$1M.
And, even then part-time is an illusion because it takes time to figure out that you've got a good one and the good ones tend to move to greener pastures.
I agree with you that hiring that talent at that level of EBITDA will take a big chunk of your profits.
But there are one of two types you'll hire. One is if your business is not going to grow much (say, <9% a year). I'm not sure that requires a $200k person. Perhaps there are some low revenue, low growth businesses that do require someone that expensive. I'd be genuinely interested in examples, for a thought exercise if nothing else.
The other is if your business will grow, and will experience the challenges associated with that. Maybe not insane growth, but perhaps 10-50% a year. Then you do need that more expensive person who has grown a company to be bigger then yours is today.
If it is the latter case, then the percentage of profits you give to that person will decrease with time.
I'm reading '4 Steps to the Epiphany' http://www.cafepress.com/kandsranch and one thing that is really nice about it is that it breaks markets down by type, such that one kind of product would be silly to take VC because it can get to profitability in only a year, whereas another would have to, because it will likely take 5 years to be profitable.
Which is really interesting, because it tells you what kind of products to build if you want to own 100% of a $10 million company, don't want to take or can't find VC, etc.
I've also seen companies fail precisely because the founders were unwilling to give up any control. They may have thought they were choosing between 100% of 10 million and 5% of 200 million, but by being unwilling to give up any control at all they doomed themselves to 100% of 0.
In fact, I'd say that the most common mistake I've seen/heard about is often people focusing way, way too much on their personal stake and control, thus crippling the ability of the business to expand.
The 10MM bplan retains the option of becoming a 200MM bplan, because they didn't shackle themselves to a VC-led investment board. You can always take funding later, if you need it.
I've only skimmed the article, but one bullet point caught my eye:
- Low salary
Opportunity rather than salary is top of mind to entrepreneurs, but that changes quickly when they struggle to support their families and pay mortgages. $175K is not a salary that leaves much on the table, especially not when you live in the expensive area around Sandhill Road.
I do find it interesting that for all the griping and sniping at sub-prime VCs and the idiot CEOs they fund, he doesn't mention one single example of either.
I worked with 2 VC's, one was an idiot and the other was great. It's like anything else.
As for $175/bay area, what he really means is live like you are 'supposed' to live if you are a hot CEO -- live in the right neighborhood, send your kids to the right schools, take the right vacations at Tahoe, etc. That may sound silly but it's part of the networking needed to play that game among that crowd.
note he says "support family", it is easy to be a bachelor on a lot less but 175k if you want to do any kind of saving for retirement, saving for your kids education, and paying for healthcare is not much. So if you want to look your kids in the eyes and say "hey I'm gambling on something for my own personal fulfillment rather than giving you the opportunities that I could easily if I had kept my old job" then go right ahead but its difficult for others to do. Thats why I want to my whole risky-taking entrepreneurship thing BEFORE having kids so you don't run into that quandary.
Well in that case you can tell your kids to go and study in a good university in a country where higher education is (almost) free...
I don't really understand why people still keep paying huge amount of money for tuition in american universities when they could get the same or better education for almost nothing in a european country
I've been to a American university and I've studied in France so I have seen the differences and the 21000$ tuition/year university wasn't better than the free (500$/year but 15$/year for people with aids) university..
So you don't need to save that much money for your kids but just teach them well enough so that they have an open mind and are willing to go out to different places to get what they want...
European universities are ~free for Europeans. They charge significant fees to non-EU students. Obviously it depends on the country/university, but it would be cheaper for someone to go to their local state university in the US than to a European one. However, it may be cheaper to be in a top-flight EU university than an Ivy League US one - I haven't checked the numbers.
I'm an Israeli and I am studying at the best Technical University in Austria (TUWien).
Tuition is 742 Euros per year. Germany is similar, and I'm pretty sure France and the vast majority (if not all) of continental Europe is somewhere in that ballpark too.
The UK is more expensive, I'm not sure about Ireland.
I had a lot of friends from asian countries in my university (about 10% foreign students there) and they paid exactly the same as me. They even got the 40% aid from the government on apartment rent as students...
The only foreign students who paid a lot of money at my university were exchange students from the us who paid their normal tuition to the american university and studied in my university for a year... In exchange, some of the french students did the same, paid the almost free tuition in france and studied in the american university for a year...
A cousin of mine got a Master's in Germany and only paid the local fee which was something like the equivalent of $800USD per year at the time. The catch is that you have to know German. She took a 10 month crash course in German at a German community college before doing the Master's. It seemed like quite a bargain, if you're into Germany.
How long ago was this? What was the Masters in? I know CS and Comp Ling Masters courses are taught mostly to entirely in English, and it's not hard to find physical science Masters through English in German speaking countries. The Nordic countries ditto, but for humanities degrees as well.
There are quite a few poor families making a living in the Bay Area that happen to have other mouths to feed too. If you want more data points, come visit my neighbors and ask them how they do it. The cost of living here is not as bad as you might think.
I probably should have been more clear - are there areas in the bay area with good schools, and homes that require significantly less earnings than 175k per year (say, 125k?) And I'd like to not spend 2 hrs commuting, because spending time with my children would be nice. In my experience, you have to pay a lot more here to get the same quality of life that you could find elsewhere.
I live in the Bay area, and am raising a family here. It is expensive - 175K/yr would probably buy you the same standard of living as 80k/yr would in Ottawa, Canada, where
I grew up.
It's not as if it's hard to actually figure out the cost of living difference between Ottawa and San Francisco. They're ranked all over the place. Ottawa and Chicago are neighbors in the rankings on the first page of the Google results. $80,000 in Ottawa therefore approximates $108,000 in San Francisco.
to raise a family with all the luxuries, conveniences and advantages money can buy, you're gonna need a lot more than $175k. How else can one pay for therapy sessions for the 5 year old, country club riding lessons with the older kid and semi-annual Euro trips for your entire family?
But if you can't raise a family with $175k, making appropriate "sacrifices" to pet expenditures that aren't necessary, and getting the best value of your money when it needs to be spent, you are doing it wrong.
Yes, but I believe he is talking about a 'they made me move to Sand Hill Rd to be near them when they invested' scenario, where $175K is worth less than half that for the rest of that nation, owing to exorbitant cost of living there.
Being that specific about where you live is ridiculous. I can see them demanding that you live in the Bay Area, or in a particular city, but the only thing I can see VCs having any say on beyond that would be the office location.
I mean, one thing they're investing in is the company being well managed and communicative. It's up to the CEO and co. to make it happen, and there's a level of trust there.
Imagine the corresponding article about roofers. It would be called "Idiot Homeowners," and say, as if it were some great discovery, that some roofers are bad-- that they overcharge you, and then do bad work as well.