An Inside Look at Venture Capitalists 199
Christopher Thomas writes: "IEEE Spectrum has a scathing review of venture capitalists this month. Authors Nick Tredennick and Brion Shimamoto paint a devastatingly cynical picture of venture capitalism from the engineers' perspective." Funny to read, but probably 100% accurate. Wow.
Like any business deal that would reqire capital (Score:5, Informative)
I have to disagree that Venture Capitalists will "squeeze you for everything." Unlike many in the "those that can't do--teach" category, I've actually done venture capital deals. I've also done private offerings (equity financing sold to individuals), bank financing and debentures (privately held debt) -- as well as non-traditional methods of raising cash.
At different stages of growth, different types of capitalization are appropriate. In my experience, Venture Capital is most appropriate after you've gotten a start-up off the ground and built a management team (which can be as small as two people).
Besides going for Venture Capital mid-way into your growth pattern, you need to have a business that can realistically offer very high growth. If you have a less explosive business, private offerings can work -- they can be successfully sold if the folks get 2-3 times their money back.
Other options include setting up a non-profit entity alongside your start-up, assigning a charitable or socially helpful role to it, and seeking grant monies from private foundations or corporate foundations. The grant money can help offset operating costs for your for-profit start-up by paying you a salary and covering some office expense and equipment.
Still other methods for raising capital include piggybacking with established businesses. For example, a publisher can get an endorsed promotion of a book or booklet from a large association, the association solicits orders for the book via its members' newsletter, you split the revenues with the association, and generate substantial incoming cash.
Re:Like any business deal that would reqire capita (Score:2, Insightful)
One question I have is... is it truly ethical to use a non-profit organization as a front for your for-profit business venture?
One idea that I've had is to do this:
This would go along with my one-man jack-of-all-trades computer sales/web design/hosting/ISP/consulting/programming/but-wai
business. But, who knows. Maybe I'm biting off more than I can chew. (Nah...)
Re:Like any business deal that would reqire capita (Score:2, Interesting)
You always have a "boss". Be it your business partners (who boss you and whom you boss) or your customers... there is someone that you are ultimately responsible to...
One question I have is... is it truly ethical to use a non-profit organization as a front for your for-profit business venture?
You probably won't have much chance for 501c3 status unless you completely separate the two businesses... better to stick with a for-profit. Starting a non-profit is hard work, and not something that should be taken lightly... or with expect for anything but a trival return on your time investment.
Re:Like any business deal that would reqire capita (Score:2)
You're 28! That's not even old enough, in most cases, to have reached full technical competency, let alone to have also reached the level of maturity and business skill where you could be entrusted with employees' livelihoods. There are only so many hours in each day to learn all these very different skills.
"Taking this long" my ass. Along with all the other things you need to learn, try learning some patience.
In a word, no. In two words, HELL NO. Anybody who would even stop to think about it has a lot to learn about ethics.
Re:Like any business deal that would reqire capita (Score:1)
Given the differences between people, surely it's possible that he's so skilled he kicks our asses? Why assume that he couldn't possibly be very much better than you or I at running a business?
thenerd
Re:Like any business deal that would reqire capita (Score:1)
I worked for a 25 year old once (I was a fair bit older) because he had worked his butt off and built up a business that I wanted to be part of. I always got paid. He always let me know how things were going. He made all his employees part of the team. In short, he was a better manager/boss than a few 40 plus aged people I have worked for.
Re:Like any business deal that would reqire capita (Score:2)
He might have the skills. It's highly unlikely, but it's possible. More importantly, 28 is not old enough to feel all entitled about the whole thing, or to whine about "oh, I've had to wait so long". Even if he is All That, there are plenty of other people who are also All That plus they have some ethics plus they've already had to wait longer due to reasons beyond their control. I'm sorry, but I'll save my sympathy for them, not some 28-year-old punk who thinks that six years past college is too long to wait to become a multi-millionaire.
Re:Like any business deal that would reqire capita (Score:1)
Charles Ferguson of Vermeer has even more stories about venture capitalists in his book High Stakes. Bottom line is, find out whether you're dealing with someone who's ethical, or who at least practices enlightened self-interest.
And a good VC (yes, they exist, yes, of course Sturgeon's Law applies) can bring a lot of value to the table. I've heard of entrepreneurs turning down higher valuations in favor of getting Kleiner Perkins on board.
Re:Engineers get screwed, CEOs get most $ (Score:2, Insightful)
Re:Wait a minute here! WTF is this supposed to be? (Score:2)
My girlfriend's father is a very business-savvy man, and he's been an electrical engineer longer than I've been alive.
However, I do agree with you, to a point. People who have no idea how to spend money shouldn't be given large sums of money. But it's not just engineers... it's rock stars, actors, directors, and whoever else thinks they know more about economics than the guys who invested in them.
If you failed Micro Economics in college, then don't expect to make millions once you find a sugar daddy and a business plan.
Re:Wait a minute here! WTF is this supposed to be? (Score:1)
Agreed, however, I must say that engineers is general and most of all programmers often are amazingly clueless.
Just take a look at the Sistina (Global File System) discussion, thats really bizzare! All they really do is to start charge people who DO use their product, the most basic thing in the world and a must for ANY bussiness that take resposibility for it's existance and the people who work in it (who have bills to pay). They get bashed here on slashdot that have mostly admins and programmers as readers, they simple doesn't have a clue.
It's like saying, there can be companies but they shouldn't be allowed to make money. It's just impossible.
Re:Wait a minute here! WTF is this supposed to be? (Score:2, Insightful)
I disagree. People who have no idea how to spend OTHER people's money to MAKE MORE MONEY shouldn't be given large sums of money.
But then one can also look at it another way. Those who can't manage other people's money wisely shouldn't be given large sums of money, UNLESS a FOOL equally incompetent GIVES his money for this moron to invest.
In the end you'll find these 2 idiots deserved what they both got from each other (unless there was fraud of some sort). Survival of the fittest my friend. Let Darwin into your home too.
Re:Wait a minute here! WTF is this supposed to be? (Score:1)
I have to say that you do have a point there.
However, programmers are engineers and most programmers I know are 100% clueless when it comes to economic realities (for example the simple fact that you must make money).
Take a look at the slashdot crowd.
Re:Wait a minute here! WTF is this supposed to be? (Score:1)
I don't think anyone have said that, thats why we have antitrust laws and such things.
BUT, profits and that people have work (profit is neccesary for this to happen) is very important to quality of live in general.
If you take a look at the old communist countries you will find that they are very poor and the people living there are in misary. This is what happens without companies and revenue.
It's not about giving companies god-given rights to do whatever they want to but to make a balanced society that can give it's citizens a good life.
Re:Wait a minute here! WTF is this supposed to be? (Score:1)
You obviously haven't heard about libertarianism. Some people really do believe what's good for big business is good for the rest of us. They actually believe things like, if you've got an environmental problem, deregulate and the market will solve it. I didn't say it made sense!
Re:Wait a minute here! WTF is this supposed to be? (Score:2, Interesting)
What is happening is that VCs draw much money into very few supposedly LARGE companies in spe, who should make LARGE profits and still hire only a FEW developers, because they can overwork them. The smarter the engineer's and developer's ideas are, the more their ideas will minimize the development, implementation and maintenance costs. So basically their own inventiveness reduces costs for their own company they are working for, reduces costs for their customer's companies (to whom they want sell their idea) and all their brain work in the end is going to do is the reduction of costs for hiring developers and engineers. If that is not a tragic irony, I ask myself what is.
The architecture of the network itself seems to lead to few "large" companies. Very few "small" profit making companies are needed. OSS is highly desirable for non-for-profit organization therefore. The only way OSS can really be funded and developers hired en mass, is by support from the government. It's a shame that OSS is not used in all educational institutions.
The monopolization is a process, which the current laws don't prevent from happening adaequately.
If I were an engineer, I wouldn't care, if I work for a large company or a small one, as long as I would believe in the product I am developing and as long I am decently paid for by the company to provide for my family. That's what apparently is not happening for too many engineers and developers, because midsize and small companies can't pull through more than a few years before they have to sell themselves out to the big guys, who most probably won't hire all of the small company's engineers and developers.
I was always wondering if the funding mechanism for companies like SuSE was different than the process described in the article. Even if SuSE lacked money lately, they did seem to grow more organically out of themselves. I would be interested in understanding, if there is a major difference (legally or culturally) in how privately held companies are formed and funded in Germany vs. the U.S.
Needless to point out that I don't know what I am talking about, but I try to listen as best as I can.
Re:Wait a minute here! WTF is this supposed to be? (Score:2)
different kinds of geeks (Score:4, Insightful)
Nope, there are, in fact, different kinds of geeks. There are the clueless geeks who think that they can make a quick buck by developing big sounding technology with expensive tools and on impossible deadlines. Sometimes they get lucky [netscape.com], but more often, they get f*cked [fuckedcompany.com].
Clueful geeks never participated in this game. They work steady jobs, save money, run small consulting business, and generally are having a much better time. If a VC contacts them, they just politely refuse.
You don't need millions of dollars in order to be happy. Engineering and software development is a decent way to make a living, and you can be quite well off without ruining your health on startup dreams.
Oh, as for the open source startups, the VCs that invested in them were fools. But if VCs are going to waste their money, they might as well waste it on something that contributes to the common good. I suspect many engineers working for such companies weren't dreaming on getting rich but just liked the idea of creating open source software fulltime. (Support of open source by companies like Sun and IBM, on the other hand, makes business sense for them.)
Re:different kinds of geeks (Score:1)
Beyond that, I'm sorry you didn't cut it as a teacher and weren't interested in engineering. However, those professions are every bit as important and challenging as being a tenured physics professor, and they probably contribute quite a bit more to our society.
Re:different kinds of geeks (Score:2)
What the guy is saying, quite correctly, is that money does not equal happiness. That's so trite and obvious that I shouldn't have to be pointing it out. Whether you realize it or not, you ascribe to this very notion by teaching physics at university instead of pursuing a much more lucrative career in the private industry. The original poster wasn't admonishing anyone to rest on their laurels; rather he was saying that we should look further than the almighty dollar when measuring success. If you have a job that you enjoy, that you find intellectually stimulating, and that allows you to make a decent living, well then I'd say you've got it. Engineering, software development, and teaching would presumably be all good examples of this in the right context.
Re:different kinds of geeks (Score:1)
Ofcause it's possible to get somewhere in life!
Re:different kinds of geeks (Score:1)
Read the book "The New New Thing." It's all about Jim Clark and his various companies. Quite interesting.
*Cough*Eazel*Cough*Ximian*Cough*
Re:Wait a minute here! WTF is this supposed to be? (Score:1)
Realistic goals ... (Score:3, Informative)
Unfortunately VCs are the only people willing to invest in high risk (read unknown to them) speculative ventures. Banks are basically pawn-brokers and bean-counters, they only risk their money on assets which have a ready secondary market. But unfortunately there's none for failed (or half-finished) ideas which leads to a fair amount of cluelessness. I've just come from a dinner where someone said that the only reason a "VC" invested in their company was that they read in Red Herring that nanotechnology was going to be "big" and they thought a name like Nano-xxxx (name disguised to hide the guilty) was related
Oh well
LL
Definitely right about sheep... (Score:5, Interesting)
I can attest to this from personal experience: I am one of a small group of people to have received the (questionable) pleasure of being cold-called by a VC firm. It didn't matter to them that I was still finishing my BSc in mathematics; all that was important to the VC was that 1. Distributed Computing was hot, and 2. I was responsible for a recent [cecm.sfu.ca] distributed computing project.
Of course, calculating Pi isn't likely to be commercially profitable any time soon; for that matter, distributed computing isn't either. So I wrote back explaining that I had no intention of helping them waste their investor's money on ventures doomed to failure.
Ever since then I've refered to that day as "the day I refused five million dollars".
Risk aversion (Score:2)
Nice attitude! There was no commercial future for things like "home computing" and garage-built Apple I's, either! Take the money and let the funds decide if they're overstepping their investors' risk aversion levels. (The highest upside generally comes at high risk, and that's exactly what some people are looking for.) Does this mean you're looking to take equity or a salary in a nice, safe, obviously commercial idea instead?
No, I respect his attitude. (Score:3, Insightful)
Furthermore, while it is true that high return investments almost always bear higher risk, that does not mean that every high risk investment will or can return a decent amount. For instance, I could loan a fugitive 1 million dollars, while this is certainly high risk, it's almost certainly a formula for ruin. This point being that some investments are simply bad investments, deserving NO investment because they do not offer a return commensurate with the risk, relative to what can be had else where. Fundamental to the field of finance is that at any given level of risk you want the maximum amount of return. This is why: some companies cannot get additional capital, why some shares are priced so low, why some land is worth so little, and so on.
Re:No, I respect his attitude. (Score:2)
But yes, if the founders themselves don't believe in an idea, it's dangerous to have empty evangelists at the VC and stock promotion level. I speak from experience!
OT, but... (Score:2)
This is rather off topic, but it elucidates somewhat the problem with flocking VCs. Distributed Computing -- as exmplified by d.net, SETI@Home, GIMPS, and my own project (PiHex) -- has so far been dedicated entirely to attacking embarassingly parallel problems: All the problems so far have been trivially decomposable into cpu-sized chunks. This makes it really easy to create s distributed computing project... working on a meaningless problem.
It is almost a theorem that "interesting problems aren't embarassingly parallel"; in fact, certain results can be proved along those lines. "Interesting" problems are always problems which don't decompose trivially: In fact, the standard supercomputing benchmark (linpack) in its normal form requires networks with latencies of a few microseconds. In general, the problems which are commercially interesting all require large amounts of bandwidth and reasonably low latencies.
Now I'm not claiming that these problems can't be overcome; the issue of latencies can generally be solved by switching to different algorithms, and the bandwidth requirements will be met over time (bandwidth is growing must faster than computing power). Thus my comments "... any time soon".
However, none of the VCs even considered such issues. They saw "distributed computing", and knew that "distributed computing" was hot... without even checking that the distributed computing being done bore much resemblance to the distributed computing they wanted to do. It's as if someone decided that they wanted to start a company to transport people between New York and London, so they invested in a company which had been carrying people from New York to San Francisco... simply because the company was "transporting people thousands of miles".
I think the VCs have gotten so overwhelmed with using buzzwords to sell their companies upon IPO that they start to listen to the same buzzwords when people come to them looking for initial funding; unfortunately most (all?) VCs lack the technical expertise to actually evaluate companies' modus operandi, so all they can do is fall back on the buzzwords.
Re:Definitely right about sheep... (Score:4, Informative)
A year ago, I would have made the same decision as you.
Now that I have studied Confucius and worked in industry for a while, I would not.
Accept the $5 million. Consider that money as research funds. Build a company. Hire engineers. Learn as much as you can, and work as much as you can. Be glad that you have a roof over your head. Acquire valuable experience. The engineers that you umbrella will be grateful.
Basically, the real world we live in is not the ideal world. Read Mark Twain and Mencken to understand this deeply. Then read Confucius to preserve your idealism, even in the midst of the crazy world that Clemens and Mencken will show you. Confucianism will show you how to commit right action, and protect idealists, even in a selfish world.
Imagine that you're an engineer. You come up with an idea that makes the company millions of dollars. What will you get in return? You'll get a $5,000 raise, and "the opportunity" to work on something that will make them even more money. Yip-pee-yah-yay. What do you think- they're going to give you enough money to retire?! You're lucky enough that they aren't tossing your ass out on the street; You're to feel lucky for even having a job.
Very few people are motivated by idealism. I am. You are. But the VC you talked with was not motivated by idealism. He was handing out money, hoping to get much more in return. I don't know what the larger situation was, but these guys aren't hurting for cash.
If the situation ever comes up again: Take the money. Work with the VC. Your VC's life will be business as usual: Some successes, many failures. If it's really bad, they might need to delay building that new house on their lot, and tearing down the old one. Learn everything you can about how your distributed systems work, and learn everything you can about how the world of funding works. You will become a more knowledgable and experienced person in the process, and fund the lives and research of many engineers with you.
Re:Definitely right about sheep... (Score:3, Insightful)
No. Tempting as it may be, don't do it. Otherwise it's just a shot in the dark. You might get lucky and discover a business that is sustainable and profitable, but then again you probably won't.
Why do you think the economy sucks right now? It's precisely because VCs are sheep and invested in any "business" that came along, whether or not doing so made sense (because after all, other VCs managed to do the same and made a boatload of cash on the IPO. Monkey see, monkey do). Worse, these same VCs encouraged many of these "businesses" to do stupid things, like grow the company rather than focus on being profitable. They did so because they wanted to cash in on a superstar IPO, even if the value of the company was doomed to drop through the floor soon afterwards. I know. I was there, and saw it with my own eyes.
Back to the economic consequences, however. The economy sucks right now because lots of VCs invested in lots of stupid startups whose "management" had no clue about how to turn it into a profitable, sustainable business, and the VCs didn't care about that, either. Again, they just encouraged the companies to grow to make them look good for IPO, so they could make a quick buck.
Because these companies grew, they bought lots of things: talent, equipment, etc. This caused a spike in the demand for talent and equipment, so salaries spiked. Equipment sales spiked. Equipment manufacturers ramped up production, thinking that the trend would continue (and, after all, if they didn't, then their competitors would get the business instead), and hired people to do this. Everybody grew, and everybody was happy.
Furthermore, you now had a lot of people (engineers, support staff, etc.) out there who were being paid a lot of money. Such people tend to spend that money, and they did. They bought houses, cars, went to restaurants, and bought lots of goods and services. The parts of the economy that service them grew to fulfill the increased demand. Again, everybody grew, and everybody was happy.
Then the inevitable happened. VC-backed businesses started to fail because they ran out of money. Oh, they did exactly what the VCs told them to do: grow and worry about being profitable later. Don't worry about spending the money to grow the company because that's what it's there for. Except the VCs were too stupid to figure out that if you don't worry about being profitable, then nothing else matters in the long run. They were concerned only about short-term returns (from an IPO) rather than being concerned about the health of the business, and the increased prices of goods, services, and people caused companies to burn through their money a lot faster than was anticipated. All the money these companies wasted on parties, doodads, etc. didn't help that situation either.
So VC-backed startups began to fail. VCs began to realize that a lot of these businesses wouldn't make them the quick buck they were after and stopped their funding. When the funding dried up, these companies went bankrupt, fired all their employees, and closed up shop. And, in the process, sold off all their equipment for cheap.
Which brings us to where we are today. There's a surplus of equipment on the market at bargain-basement prices because all these failed companies (or whoever acquired their assets) are selling it off. So as a result, equipment manufacturers are unable to sell their stock of equipment at a profit. And remember all those people they hired in order to ramp up production? They've had to get rid of them, and all the support staff they needed to deal with the increase of customer support calls and all the things associated with that (field engineers, etc.), since the number of customers who need support (and who can buy support contracts) has dropped through the floor.
There's a surplus of people in the market because they're no longer working for the startups (who went under) nor are they working for the equipment manufacturers (who are getting rid of people because demand for their products and services has dried up).
And the companies that provided all those goods and services that people were buying? They're starting to hurt, too, since there are now a lot fewer people with money to spend on such things. Worse, the supply of such things increased to meet the increased demand. But now the demand is down significantly. That means prices will fall through the floor and most providers will go out of business.
It's a self-adjusting situation, to be sure. But don't kid yourself: the adjustment hurts. And because the economy has a strong positive feedback component (think about it: drop in demand means drop in prices, which means more people with less money, which means further drop in demand), the downward adjustment can easily go a lot further than it should.
So no, he shouldn't have taken the money. You think the money grows on trees or something? That money represents the fruits of the labor of countless individuals. When it's not spent wisely (on things that people need now or in the future), bad things happen to the economy. As has been proven by the dot-bomb fiasco. The people who took VC money knowing that they couldn't achieve a sustainable and profitable business are at least partially guilty of causing the economy to go into the toilet.
If you want to do research, apply for a research grant. Such money is expected to be used for such purposes, and isn't expected to gain any real return (research, after all, is by its nature a very uncertain thing -- a shot in the dark). That's why it's a "grant" and not an "investment".
Re:Definitely right about sheep... (Score:3, Interesting)
A feudal lord has a bunch of land, which he bilks peasants into farming. He gets 90% of the yield, and lets the farmers hold onto somewhere up to their 10%. That 10% for the farmers is divided up in such a way as to work the farmers, so that they can strive to improve their lot. Give the best farmer x2 as the weakeast, but divide it all up so that it totals 10%.
You're right: The VC's money represents the fruits of the labor of countless individuals. You're a sucker (not only have you been ripped off, but made to feel that it is just) if you believe that the VC's are the laborers themselves..! We're still living in medieval times, people just don't know that they're peasants because they aren't being manipulated through force and police action.
If a bunch of mobsters want to throw a party for everyone, train everyone in computer skills, employ and house them, I say let them. The flow of money from someone who doesn't deserve it to someone who does isn't something I'm going to lose any sleep over.
Technology Welfare (Score:1)
If he takes the $5 million and goes to build a business, even if it fails (which it might not), he is going to have a huge learning experience. There is really no substitute for running your own company to understand what it takes. (People who have done it all say it's required and people who haven't all say it isn't.
I also think it is silly to think that grants are "less damaging" to an economy than a failed investment because it is known ahead of time that the money is going to be gone. In fact, I disagree with the whole premise that failed investments hurt the economy. The money invested in those companies doesn't "disappear". It goes to pay engineers salaries and buy Aeron chairs, whose purchase price goes to pay salespeople and assembly line workers and castor manufacturers. The engineers take the money and buy computers and pay for daycare for their kids and go to McDonald's with that money.
All it really is is redistribution of wealth from the very rich to the technically advanced. And I'm in favor of that.
Crash
Parts are ridiculous (Score:1, Insightful)
Look, for example, at hard disks and floppy disks. In the hard-disk business, there have been as many as 41 rivals fighting for market share. Only three major manufacturers competed in floppy disks. The hard disk has improved much faster technically; the floppy disk is stagnant by comparison. I'm not talking about market size or market opportunity (the hard-disk business versus the floppy-disk business); I'm talking about rates of innovation.
Although his thoughts are noble, in the real world, who is going to willingly do something to help kill their own company? Will the engineers do that? If say I started a video game company, why would I HELP someone else start a competing video game company? Same with investors. Why would an investor put money in one video game company, and then fund a competing one? The conflict of interest alone could get him in serious legal trouble.
Really, we all want our society to compete and innovate. But that should be done on a legal level (anti-trust laws, for instance). To expect it from people on a personal level or a corporate level is totally ridiculous and will never work simply because humans are selfish creatures. We will always serve ourselves before serving others. To think that human nature can change without force is a bit naive.
Just think, if you had tomorrow's lottery number, would you tell the whole world about it or would you buy the ticket all for yourself? Now be totally honest.
Re:Parts are ridiculous (Score:1)
As proponents of the Friedman school of voo...err economics like to remind us, a rising tide lifts all boats, economics is not a zero sum game, etc.
Often, early in an industry life cycle, competition is good because it grows the overall market; think of the early PC or automobile markets, where the biggest challenge was not to get a sale from a competitor, but rather to convince people they wanted your product at all.
Now, when you get to a mature market, and you've convinced everyone they need a particular new geegaw, you need to start slitting the other guy's throat. But until then, it's better for him to get a sale (converting people to the idea they want what you both sell) than to have people fialing to enter your area of the market as a customer at all.
exactly (Score:1)
Also, the comparison is not quite valid. He's comparing a standardized removable medium with a fixed medium. One is a docking bay for standardized cars, and the other is a magic box that you put things in. Who would you rather be? The company that sells approx 1/3 of all floppy disks, or quantum... oh wait... they don't sell hard drives anymore.
Angels: Nicer but more vulnerable (Score:1, Interesting)
At my last startup, we were mostly funded by angels. Unfortunately, unscrupulous people in upper management took them to the cleaners. The upper management took worthless business trips to exotic locales, and bought extremely expensive office furniture. By the time we got the crooks out it was too late, the money needed to fund development and pay salaries was gone. Then the economy turned sour, and relations between the new management (who had been the old middle management) and the angels broke down. Personally, I felt bad for the angels, they had paid my salary for two years and given me a chance to be essential personnel at a company that had a viable business plan. If the con men hadn't eaten up all the money and left a husk, I might be making a reasonable (I never expected vast wealth) living now instead of collecting unemployment and the angels wouldn't have had to see their money tossed down a drain.
All I have to say about this sumbission is .. WOW! (Score:1)
As a total GPL'er and Linux advocate, no article I've seen in recent memory truly distills the geek/aristocracy dynamic as well as this one does.
This shit goes back MILLENIUMS, folks! There's nothing new here.
It's, however, ohso nice to see it updated so well. Congrats to all involved.
A typical VC trick (Score:5, Informative)
The old saw about "The world beating a path to your door if you have a better mouse trap" is pure hokum. The one thing that Microsoft proved with Windows 95 is that if you have enough marketing money you can sell anything - no matter how bad it is. Conversely - take the best commercial program you can find - write up a sign that says "Software $5.00" stand on a street corner with the sign and see how many copies you sell. I have tried that: all you'll get is sun-burned; marketing is far more important than product when it comes to making money in a business.
Re:A typical VC trick (Score:1)
I wouldn't be so sure about that. The message right before this one was about being cold-called with an offer of $5 million based on a press release.
It is impossible (read it again) impossible to replace quality with marketing. In the short term (read: one quarter for a stock price bump) it might work. In the long term, a competitor with a quality product will eventually take over the market.
Word of mouth advertising is still the best kind of advertising, and it's free, if the company has a quality product.
As always, YMMV
Don't let them take controll (Score:2, Insightful)
/Jarek
Re:Don't let them take controll (Score:2)
Re:Don't let them take controll (Score:1)
An investor does not need to own the company to control it. If you followed the ArsDigita saga, you'd see that a small stake, sharewise (
Autodesk rejected external funding when it found precisely these sorts of fishhooks in every contract they looked at.
Read _The New New Thing_ (Score:1)
The New New Thing, by Michael Lewis, is an account of Jim Clark's adventures in Silicon Valley. Clark created Silicon Graphics, which was stolen from him by VCs. He used what he learned to extract much more favorable terms from the VCs when he started Netscape -- the company that caused the Internet boom, and rewrote its financial rules, by a) creating fabulously wealthy *engineers* (although the VCs made out like bandits too) and b) going public when profits were only the foggiest of concepts.
This book's a great look at Silicon Valley venture capital and definitely supports Tredennick and Shimamoto's observations. Looks like the VCs are back to business as usual and only experienced, buzzworthy engineers like Clark can get decent terms.
summary (Score:1, Insightful)
Personally, I'm a very very good engineer.
However the way our society works is that the best engineers are the ones that haven't had time to open their mouths and remove all doubt.
The way the engineering career path works is you very quickly sell out and replace the values of being a good engineer, with the values of deferring to authority and accepting "things" the way they are, so that when you are older you can take advantage of these values to maxime your own PERSONAL gain.
In fact, this extremely typical career progression and value development merely leads to being a Vulture Capitalist at the end. The only real complaint people seem to have about this whole situation is that others are at the top of the food chain and not themselves.
I'd love to be in their position and screw anyone I want (clueless engineer drones or management wannabes).
Want to come out on top? Then stop complaining about the existing hierarchy. There are easier ways to succeed then by "changing the system".
Want engineers to have more power? Screw the people who have the money - that will cause a quick transfer of money and power. Maybe not to you though.
Re:summary (Score:2)
And people who have been wronged and are enraged tend to shout about it, whereas those who have been treated decently just expected it. So they don't say anything.
VC's are one example, but only one, and not the most vicious. Somebody above said (approx.) "You need more money, then bend over." But it's worth remembering that some people experience that being said literally, and without the promise of any reward. Not even "and then I won't kick you".
The problem is a power imbalance.
Some DUMB idea's deserve to die!!! (Score:1, Interesting)
Trying to building a firewall without a uP was an exceptionally DUMB IDEA!
First you would have to build a real fancy state machine. TCP/IP protocols are based on streams of bytes/bits. Doing a couple of states in a parallel hardware design is easy, but thousands, or ten's of thousands of states is nearly impossible. Plus, a firewall needs to be flexible, (catch the latest un-expected hacker exploit, log it, etc), which is something most hardware designs are not.
Hence the idea of using Microprocessors is a very useful thing. B.T.W. What where they going to use to drive the I/O interfaces? All the designs I know of need at least one micro to run them! (I.E. Program dma lists, handle errors, etc). Unless you're going to re-invent those wheels as well, and build your own custom interfaces.
In summary, that idea deserved to die, it failed to reduce risks too an acceptable level!
The VC's were right not fund a real dumb idea, next time, pick a better example.
Re:Some DUMB idea's deserve to die!!! (Score:2)
Depends on how complex the states are. It might be possible to compile the hardware from a representation language that is close to the IP domain.
> Plus, a firewall needs to be flexible, (catch the latest un-expected hacker exploit, log it, etc), which is something most hardware designs are not.
Hmm. He said they were using programmable logic. There are programmable logic devices that are dynamically reconfigurable in real time. I assume they would use them.
The idea was definitely high risk, but in my opinion can definitely be done. I work with equally complex ASICs every working day of my life. Whether it is worth doing, is very arguable; but it's definitely possible.
Re:Some DUMB idea's deserve to die!!! (Score:1)
Just one 64 KB IP layer packet can be constructed from 60+ ethernet packets, and/or 1200 ATM packets. All/any of which can be received out of order. After it is assembled, you can verify the checksum and the begin checking the payload. Then you've got to add time-out's, duplicate discards, CRC handling, retries, sliding window acknowledgments. Once data contents are checked, then the IP packet can be sent along to the destination, (another 45 or 1200 packets worth of packets sent, retries, collision detects, Ack's, etc.). So far I just described ONE IP packet of One IP Stream. Add in processing multiple IP streams at the same time, plus the extensive memory management to keep track of resources.
So far that's just up layer 3 stuff, you still got TCP layers 4 through 7. Anyone who thinks they can accomplish the objective without using ten's, hundred's of thousands of lines of CPU code is dreaming. ASIC only implementation without CPU, forget about it.
B.T.W.. Implementing a somewhat slow CPU in a programmable ASIC is a terrible waste of very expensive resources (>1/2 of 500$ programmable ASIC). It much/much cheaper to use a very fast DSP ($10 + $10 DRAM) to perform such tasks. You might use a smaller ASIC ($20) to accelerate some of the slower, repetitive logic processes, but that's about the maximum extent of any ASIC usage. If any of you had written any Unix Network device drivers, protocol layers, you would quickly realize the folly in your statements. Just configuring the ethernet link types is a fairly complex task (needs a CPU), HDLC ATM virtual circuits even more so.
Just one 64 KB IP layer packet can be constructed from 60+ ethernet packets, and/or 1200 ATM packets. All/any of which can be received out of order. After it is assembled, you can verify the checksum and the begin checking the payload. Then you've got to add time-out's, duplicate discards, CRC handling, retries, sliding window acknowledgments. Once data contents are checked, then the IP packet can be sent along to the destination, (another 45 or 1200 packets worth of packets sent, retries, collision detects, Ack's, etc.). So far I just described ONE IP packet of One IP Stream. Add in processing multiple IP streams at the same time, plus the extensive memory management to keep track of resources.
So far that's just up layer 3 stuff, you still got TCP layers 4 through 7. Anyone who thinks they can accomplish the objective without using ten's, hundred's of thousands of lines of CPU code is dreaming. ASIC only implementation without CPU, forget about it.
B.T.W.. Implementing a somewhat slow CPU in a programmable ASIC is a terrible waste of very expensive resources (>1/2 of 500$ programmable ASIC). It much/much cheaper to use a very fast DSP ($10 + $10 DRAM) to perform such tasks. You might use a smaller ASIC ($20) to accelerate some of the slower, repetitive logic processes, but that's about the maximum extent of any ASIC usage.
Whoa! (Score:3, Funny)
An inside opinion... (Score:3, Insightful)
While the article in question has some obvious flaws, in general, it's on target. VCs are looking to screw you any way they can, in the hopes that it'll make them some money. It doesn't matter whether they're dealing with engineers or financially astute CEOs.
The general pattern looks like this:
1. Meet with the VC, present the business plan
2. The VC offers unrealistic terms -- like, grow the company by 1000% and we'll invest the money, and make financial assumptions on 1000% better productivity.
3. Lather, rinse, repeat, until you realize those are the only type of terms you're going to get.
4. Nod along, get the cash.
5. Hire like crazy, according to the "plan".
6. Money runs out in some short period of time (usually around a year). Nothing has happened, because growing a company by 1000% doesn't give you 1000% better productivity, even if you were hiring pre-trained employees.
7. VCs say, "gee, shucks, guess we need more money". BEND OVER.
6 and 7 get repeated a few times and all the original players get diluted to nothing (except the original VCs, of course). You go IPO with a horrible product and no cash inflow; the VCs make their cash, but your company is bound for failure, and your restricted options/shares guarantee that you won't make any money. Or you go under and the VCs swoop in and take the technology in an attempt to sell it to get some of their money back.
Welcome to high tech.
Re:An inside opinion... (Score:1)
"Probably 100% accurate" (Score:2)
What an interesting phrase. Is it 90% probable that it's 100% accurate, or just 51% probable, and in any case what the hell does that mean? Are you certain of its accuracy, or uncertain? Or are you not sure which you mean? ;-)
Best advice for enterpreneurs... (Score:1)
This way you make sure your planning stands on two grounds : with or without VC money, and you make it much harder for VCs to pressure you into doing things which are totally stupid.
But this suggestion is definitely not easy to realize, but if you can have it you will probably stand your ground with a stable company for a long time ! It will also help your valuation a lot.
Engineer incentives (Score:5, Interesting)
To be fair, some VCs do recognize this and do something about it. I have a friend who's been involved in a few startups. Not too long ago he described what had happened in one funding round. BTW, you're practically always involved in some sort of funding-related activity or another, all day every day. If you're a true techie you'll go insane wishing you could sit down and write code again. Anyway, this is basically what the lead VC said:
What ended up happening is that some of the previous-round investors saw their share reduced so the founders' share could be increased. I'm sure they didn't like that much, but I'm also sure that if it was presented as a choice between that and losing the lead investor (with nobody else ready to step in) they would have gone along. Losing the lead investor like that at that point in time would basically have meant that the company had zero prospects of survival (in fact it did not survive).
The upshot is that a "vulture capitalist" really - for once - did try to do the right thing by the founders, and even leaned on other investors to make the right things happen. They're not evil people. They're ambitious, they're greedy, they're often ruthless, they almost always have goals that are at odds with techies' goals, but they do have honor.
I wish I could name the east-coast VC company involved, because I like to see good behavior rewarded. Unfortunately, I don't feel safe doing so. One character trait they hold very dear is "discretion"; it's not very discreet to tell stories like this one in a place like slashdot, and I might want to do business with them myself someday. ;-)
They're not all amoral, but many really are. (Score:2)
Speaking in general terms:
As a community they are extremely incestuous.
As a community they are very risk averse, in a personal sense. They're willing to risk their investors money, but not if they themselves will hang out to dry. What this means is that they'll invest in the latest fads, so long as the herd is with them. By and large, they will not invest in superior investments from a risk/return perspective, if the herd is not there behind them.
Many are extremely amoral. There is a difference between being greedy and neglecting obligations and duties, to both the investors in their own funds and investors in that companies that they hold board seats on. I've personally seen this border into the illegal territory.
Many are simply ignorant--in both the financial, operations, and technical sense. Ok, they don't need to be experts, but what makes them dangerous is that the dont know what they dont know. On technical issues, they consult "experts" that are not experts in the least and consider it "expert" advise.
Most are in there for the short term. They're willing to invest in companies that are doomed to fail, just as long as they can flip it over in an IPO or to another company before it craters.
And it goes on... I really hate to make such sweeping statements, but this a terribly universal experience with VCs. Not just one or two firms, but many of them, in different regions and industries and from different perspectives (CEOs, founders, engineers, etc).
In short, many VCs really serve all involved poorly [In other words, I believe there are better real-world solutions for the necessary parties]. There are some really good VCs out there, but they are hard to find and they have finite resources. A beginning entrenprenuer would be well advised to get some solid and independent advise, both legally and otherwise, from people that are experienced with startups and dealing with these kinds of investors. Especially when it comes to issues like drawing up a solid board of directors...
What constitutes evil? (Score:1)
Re:What constitutes evil? (Score:2)
Then I would say you have a rather weak definition of evil. Ambition, greed, or ruthlessness do not necessarily involve a total lack of interest in the suffering or anguish one's actions cause. They do not necessarily make one more likely to cheat, steal, break promises, or worse. There are people in the business world who will tell you a lie that will wipe out your life's savings, and they won't even blink. Some will even take pride in having been so clever, and brag about it to their friends. Those are the people I would call evil.
Aside from the percentage of bad apples that exists in every field, I don't think VCs are evil in that sense. They don't want you to fail. They are, if not friends or even necessarily allies, not adversaries in a zero-sum game. Their ambition and greed are what - along with your own ambition and greed - what brought you together, and their ruthlessness can work for you as well as against you. They might not be the best of company, but calling them "evil" robs the word of meaning. If that's evil, how little must someone do for you to consider them good?
I would really LOVE to hear from Philip Greenspun (Score:1)
I think Venture Capitalists, with this behavior, will f*ck themselves out of a job. Check out the SBA [sba.gov] They give very favorable terms. --BlueRain
Engineers and Managements (Score:4, Insightful)
1) VCs, in general, are not very trustworthy. They are in business, they are looking to make money, and they are not afraid to step on some toes to get it. I don't think there is anything particularly shocking about this, but it is something to keep in mind when dealing with them.
2) "Your ideas, Your work, Their company" - let's not forget their money. As the author of this article himself points out, it is very difficult to raise money. The fact that VCs give people astronomical amounts of money and ask for something in return (i.e. a share of the company and a voice in how it is run to protect their investment) is not unreasonable.
3) VCs, like most people, and especially those controlling large amounts of money, tend to have a herd mentality. Do they take more risk than the average investor? Absolutely. Looking at the number of ideas that have been funded in the last few years and then turning and blaming vcs for not funding "enough" risky ideas to me seems pretty silly.
4) Good management is critical to the success of a company. This may be anathema to many of the people who frequent this site(or at least this topic), but one of the mantra's of VCs is "management, management, management." Now, I am an engineer, I started a company, but I am more than willing to admit that:
A) I am not well suited to managing it
B) If I don't find someone who is, the company will have real difficulty succeeding.
Now, obviously there are many examples of companies that have been run into the ground by bad management. Does this mean that management is evil or (perhaps even more absurd) unnecessary? No. Good management is critical to a company's success, just as bad management is critical to its failure. This may not be pleasing to our egos as engineers, and there may be exceptions to this, but having worked with some good managers and some bad ones, it seems to me to be generally true.
5) Engineers are often not good managers. Let's be honest here. Sometimes the guy from Wharton is a really lousy manager. But just as often (I would argure more often) the brilliant programmer is also a really lousy manager. Being a good manager is an hard-to-acquire skill, in some ways as nuanced and difficult to achieve as technical proficiency. Just as a cs degree does not assure programming competence, neither does an MBA assure management competence.
6) In general, I found this article to be whiny and annoying. Yes, I don't like VCs either. Many of them are "sharks"(as I was told before I got involved with them, and have generally found to be true). They are not necessarily (and I would argure are rarely) the best businessmen, the best partners, or the best engineers. They are though the guys with the money. And if your talking to them, you are most likely the guy who needs. Now, the historical balance of power in relationships between those having money and those asking for it does not need to be summarized here, except to say that one of them (I'll give the author of the article a hint, not the one without it) holds a significantly stronger position.
What would be nice is a more practical-minded article about engineers dealing with VCs(because there are many useful things to keep in mind, and are things to watch out for, even if you don't have an axe to grind), rather than the sort of flailing complaints that we have received here.
John
Missing element: risk equals reward (Score:1)
However, there's a big missing piece here. The reality is that the money goes to those that risk the most, not those that work the hardest (or have the best ideas or IP, etc.). That's just the way it works.
Yes, the engineering is a critical element to success, and it would be nice if the engineers got a bigger share. But start-ups are extremely risky (look at the failure rates), and the initial investors are putting up a huge amount of money and rolling the dice. Most engineers will lose a whole lot less than the investors if the company goes under.
Most startups don't need venture capital (Score:3, Interesting)
Benefits:
1) Paying out cash to employees is inefficient, since the marginal tax rate in America is roughly 50% (28% Federal income + 12.4% SocSec + 2.9% Mediscare + the state income tax that pays for the roads/schools/fire/police that people actually use). This is known as "soaking the rich", aka slavery, aka how the Democratic Party has adapted from the pre-Civil-War era to the Information Age. Equity doesn't get taxed until it's sold, and the long term capital gains tax is 20%. Which is why the 1993 Federal income tax hike didn't kill the economy, people just switched to financing with stock instead of cash, which had the unfortunate side effect of making it easy to fund things like pets.com.
2) Very little corporate overhead, very simple. Minimizes contacts with lawyers, accountants, and other such creatures that add friction to the economy.
Problems:
1) The U.S. Federal Tax Code is rigged to royally screw companies that pay out dividends. Corporate profits are taxed once as income, and the stockholders are taxed again on what's left of that income when they receive their dividends at the stockholders Federal income tax rate. So $1,000 in gross profits becomes $650 in net profits becomes ~$450. Possible workaround: profit-sharing checks for the employees, but that doesn't help angel investors if you have them. Killing the double taxation of dividends would make more sense but it would never get through the Senate.
2) Surviving on little to no income while the company gets off the ground. Even without dependents, just paying for housing is a bitch, and geeks tend to congregate in territories with the looniest real estate valuations. (In the Midwest, that means my home city of Ann Arbor, Michigan, home of the University of Michigan, with housing valuations second only to Chicago.) The reason valuations are so high is that the Federal Mortgage Interest Deduction encourages real estate inflation, and the average voter is too stupid to realize that giving up their precious deductions (aka social engineering) and switching to the Flat Income Tax [flattax.gov] plan would leave them at least as well off. Local zoning regs that make high-density development impossible do the rest (thus why we have yuppie lofts in renovated decrepit downtown buildings renting for $big bucks rather than highrises).
3) Stock is much riskier than cash for workers. Nice upside when it works, though.
4) This doesn't work for companies with heavy capital expenses. Fortunately, many/most geek companies don't fall into this category.
Fair warning: IANA(lawyer | accountant), just a geek who follows finance and politics enough to be dangerous.
Re:Most startups don't need venture capital (Score:1)
renting for $big bucks rather than highrises).
Ah, the Flattax, which gives breaks to companies (deductablity of expenses) and denies that to individuals. An individual expenses (housing, education aka human capital, car, etc.) are not deductable, despite them being used in teh exact same matter as a company's, i.e. produce revenue aka income.
Of course, what is income for a Flattax - will my company's (deductable to them) purchase of a car for my use be income to me? How about housing they provide? Maybe I'd be better of becoming Me, Inc. and selling my product to a company to produce revenue, from which I deduct my expense (house, car, commute, etc.) Or, my company provides those things and I take a lower salaray (income0 to reduce my tax while providing my employeer with deductions (expenses).
You also forgot one definition:
Objectivist - someone who wants teh government out of their busienss, until a better competitor comes along and beats them, at which point they run to big brother (aka government) and cry foul and whine until it steps in (aka Microsoft vs everyone).
Re:Most startups don't need venture capital (Score:2)
Corporate capital investments are fully deductable first-year rather than depreciated and any unused deductions are carried forward. That ends the disincentive to invest in productivity-enhancing capital equipment, and I guarantee the companies that build that equipment (say, PC vendors) will appreciate it, even though they'll be paying more in taxes because they're doing more business.
Re:Most startups don't need venture capital (Score:1)
All teh falt tax will do is cause people to dream up new ways to reclassify income as an expense (such as incorporating and being a firm of one, perhaps. Why should a company get expense carry forward, but an individual gets one flat deduction, and if his/her income is less, no carry forward.
All a flat tax is is a new way for "Big Brother" to decide who benefits from the tax code.
Re:Most startups don't need venture capital (Score:2)
Companies are just tax collectors, btw. Their customers pay their taxes. It's just easier for politicians to tax an abstract accounting construct than a flesh-and-blood individual. All the same, having the same 17% rate for individuals and corporations minimizes the risks of accounting trickery.
And people already use sole proprieterships for exactly what you describe. The current 40,000 page tax code is abused almost as much as it is abusive. With the Flat Tax, auditing is simpler, compliance is easy (not to mention possible), and with the lower tax rate there's far less incentive to cheat. And you get to skip the TurboTax tax. Companies won't need platoons of accountants and tax attorneys to figure out how to comply with the tax (some, but far less), and we'd remove the primary source of corruption in Washington: special interest buying (and Congressional selling) of tax loopholes.
Re:Most startups don't need venture capital (Score:1)
Actually, there's still social engineering, you've just changed the goals. For example, you now shift much of the tax burden to individuals directly, rather than hiding it in higher costs of goods. You also now value corporate spending more than individual, because you give them deductions you deny individuals. Companies get expenses and capital deductions, which individuals do not. In fact, they lose the biggest capital deduction they have - the home mortgage. You've created a two tier system that now discriminates greatly against individuals.
Companies are just tax collectors, btw. Their customers pay their taxes. It's just easier for politicians to tax an abstract accounting construct than a flesh-and-blood individual. All the same, having the same 17% rate for individuals and corporations minimizes the risks of accounting trickery.
Sure, but I decide by my purchasing power which taxes to pay. All a flat tax will do is change the accounting trickery to accomplish the same thing we do today - minimize our tax burden. As an individual, I'd be looking at ways to create a corporate shell to hide revenue and maximize expenses. And if you don't think companies will get special provisons that create new types of 'expenses" and "capital expenditures" passed by Congress, I'd ask why do you think 200+ years of political chicanery will disappear overnight? More importantly, why do you think anyone in Congress would support it if they didn't think they could still serve "their" special interests?
Re:Most startups don't need venture capital (Score:1, Insightful)
The problems you list are the reasons most people don't do it, namely (2), (3) and (4).
Problem 2, restated, is "people generally need incomes, which pre-revenue businesses obviously cannot provide without being capitalized."
Problem 3, restated, is "stock in pre-revenue companies is a risky investment"
Problem 4, restated, is "pre-revenue companies often require equipment/plant [economic definition of CAPITAL, not 'money'] to get to break-even cash flow"
Congratulations, you've basically stated the need for venture capital.
Your credibility is further undermined by making statements like
1. "a skeleton crew of support staff (ie, people who will find paying customers)". Everyone position outside engineering, even in high-tech firms, requires a different skill set. If you think finding the first set of paying customers for a unique, new product is easy, you obviously haven't actually tried doing it.
2. "Minimizes contacts with lawyers, accountants, and other such creatures that add friction to the economy" Again, these people provide specialized services that are necessary overhead to having a largely functioning free market. For lessons on what happens when law is arbitrary or unreliable, accounting rules are vague or unenforced, just study Russia, China, Korea, even Japan,
I am actually an engineer / entreprenuer, and get annoyed when engineers with an arrogantly upturned nose for all they choose not to pursue attempt to lecture on how things ought to be. I mean really, you damage my credibility along with yours.
It's not Unfair (Score:4, Insightful)
Now, I'm sure that in the Real World it's more often that the IP would be worth $150 million, and the engineers brought in maybe $5 million, and the VCs only pitched in $50 million, and the engineers end up with a 15% share of something they conributed 75% of.
It takes money to make money. You might have a great idea, but generally great ideas need financing. I might make the world's greatest cheesecake, but without the hundreds of thousands of dollars needed to buy a restaraunt, outfit it properly, fill the pantries and larders, hire and train employees, purchase advertising, invite the media &c. my idea is worth very little indeed. Someone needs to finance me--and he's taking a huge risk. That costs me.
The best solution is to finance your activities yourself. If you cannot, sell the rights to your IP to others. You lose the opportunity to become the leader and known name in that market (which one needs to survive after the patents expire), but you turn your idea into cash. You might then use this cash to fund another idea, and this manner become the market leader. When the patent expires, it doesn't matter, because everyone knows and trusts the Smith family of widgets. And then you'll have a profitable corporation.
Remember, though, that it's more lucrative to have a 1% share of a $100 million concern than it is a 10% of a $5 million concern.
Re:It's not Unfair (Score:2)
Although it seems unfair that the farmers get so little of their rice yield, what is their share in the land itself? Obviously they've brought labor to they table, but think about how much land the feudal lord brought to the table! The farmer's labor is being paid for, so let's ignore it for a moment. The rice may be worth several mil; the farmers brought along their cardboard box homes. The feudal lords brought a shitload of land. So in fairness, the farmers wouldn't even have a 10% stake in the rice yield-- anything more than that which they have is a kindness.
I imagine in the Real World, it's more often that the rice yield would be worth $150 million, and that the farmers brought in maybe $5 million, and the feudal lords only pitched in $50 million worth of land, and the farmers end up with a 15% share of something they did 75% of the work for.
But Hey! It takes money to make money. You might be the best farm worker in the world, but if you don't have land, you're shit out of luck. You've got to find a Lord who will let you farm his land. Remember, if a lord is going to let you farm his land, he's taking a huge risk. That costs him, you know? You should consider you lucky he lets you walk on it at all. Supply and demand, you know? Supply and demand.
The best solution is to get your own land. Despite the aforementioned difficulty of making money with money, and those terrible risks, and the poor deranged farmers, the best solution is to become a feudal lord yourself. (Think of the poor, noble, nobles.) So go get your own land. If you can't, discover a new country, and see if you can get some Lord to reward you for discovering it. When you get land, you can take advantage of other farm workers, and get rich!
If you're content to be a farmer though for some reason, you should look for a lord who has good soil. It's better to have a 1% share in a great crop, than to have a 10% share of a bad one.
I haven't found a new country yet, but I still think about it. I keep looking in various places, but all I see are more feudal lords in every direction. One day, I'll find a new place, and be just like my Noble Lord. Until then, I'm going to vote Feudalist, so that when my day comes, there won't be any of those crazy laws that those damn peasants (well, I'm a peasant, but just for now- one day I'll be a Lord!) keep proposing. If I let them steal from my Lord, when MY turn as Lord comes up, they'll steal from me!
Why It Works the Way It Does (Score:1)
Where he goes wrong though is when he says that it shouldn't work that way and that somehow the investors are jerks and want all these things to fail. Let's examine the loss state (out of business) for both parties in the transaction.
VCs
A VC takes in money from private investors, distributes it out to these startups, hopes that they work and that he can get his money back out. His job is to make rich people 20-40% a year and that doesn't happen till the money comes back out.
When a company is going in the shitter, the LAST thing he wants to do is shut it down, because then he has to recognize the loss on his books (and explain it to his investors). Instead he puts more money in (sometimes) to keep it alive. However now he's really puckered up because the stakes have gotten higher and the risks are also known to be higher. He is like a First World bank lending more and more money to the Third World to enable them to pay the interest on their original loans. Also, he feels that the company is in the shitter for a reason, so when he puts more money in he often dictates management and strategy changes in a desperate attempt to "fix" whatever got them where they are now. Taking control and changing strategies is an alternative to DEATH for the company--many times death is what happens instead. Which is better? Depends.
So in the worst case (which happens a lot), the company finally does die at some point after a few millions. The VC takes the phone calls from his investors and explains how the next one is going to make it all up and how they are all high-risk and only one or two have to hit to get the returns they are looking for. If those one or two don't hit, the investors' billions are GONE. And from a personal perspective, if his fund returns suck, his career is DONE. He can go work at Starbucks because his days of managing rich people's money are over.
Engineers/Technologists
- Have an idea.
- Get Millions of dollars in exchange for a piece of paper called a stock certificate.
- Sit on Aeron chairs and work on the technology. Maybe it gets done and maybe it doesn't.
- Earn a salary the whole time.
If it goes in the toilet, give them another piece of paper (and perhaps voting control of the company) and you get to rinse/repeat.
If they don't give you more money, shut the company down and get another job somewhere in a couple weeks or a month. Big deal.
The VCs are the ones at risk in these deals. I suppose there could be a couple of examples where VCs took control on a late round, booted the original inventors and made it huge, but I would challenge someone to actually come up with a NAME of one. I think it's a myth.
I would hate to be a VC these days...
Crash
Zero Sum Game (Score:2, Interesting)
It is really very simple. There is no such thing as a "win-win". Or rather there is no reason why a win-win has to be 50-50.
When dollars are on the line, it is a zero sum game. What the VC gets, you don't get. What you get, he doesn't get. What he doesn't get, his investors don't get.
If you were an investor in a VC fund, you would want that guy chiseling every percent he could from the companies he funded. As the entrepreneur, you want to chisel every percent for yourself. Both sides are justifiable and equivalent.
It's nothing personal.
Seeking a local maximum... (Score:2)
As I've seen from companies I've been in, what really matters most is not IP or existing code assets, but in fact the employess working on them. No matter how good the IP you mioght have, it is worthless without a team working well with each other to bring an idea to fruitful realilty.
By attempting to pay the people that actually make things real less, you are more likley to loose some employess and thus reduce the effectiveness of the team. You then reduce output and in the end the returns from the company.
More than that though, if you seek to make the employees with the good ideas and a knack for execution much better off, then later (after the company has produced) these same people can feel free enough to go off and start thier own companies with other good ideas, producing even more companies to reap profit from.
I see it as the difference between slash 'n burn farming vs. real cultivation.
missing the point... (Score:2, Interesting)
the VC's goal in investing is increase his money immensely. Just like a lot of folks had as a goal when they dumped untold millions on Power Ball or the Big Game. Start Ups are VC's version of the lottery, and just like when I lost powerball, both toss the ticket when it's clear it's a looser. (and since these are folks who if they loose a few dollars aren't going to miss a meal, it's little emotional investment for them to toss you and your company)
Just like a loan shark, expect unreasonable demands, exhorbitant interest rates, and an indifference to anything but getting their money back and the expected rate of return... since VC is a little more than legal loan sharking.
As a founder it's in your best interest to be very very clear on this before you sell your soul to the devil. My suggestion for an education is go look up the reference to Mark Twain's Republic of Gonder... walking in assuming these people are interested in anything more than their money is just poor thinking.
Re:missing the point... (Score:1)
Where you are wrong is in calling it "their" money. VC funds have gotten contributions from tens or hundreds of other people out there to make up their funds. Their own money is almost always a very small (1%) proportion.
Crash
Eco-Socio-Psychological Reasons VCs Behave (Score:1)
This is basically what my firm, Alacrity Ventures, does. We started after the sale of Consensus Development (who wrote the reference implementations of SSL 3.0 and TLS 1.0) to Certicom. We are not a $100M fund -- only the personal investments of the founders. In over two and a half years of investing, we have yet to have a single company go under, which in these troubled times I believe to be a spectacular record.
However, after investing in over a dozen companies, I have discovered that there are some real reasons why VC's behave the way they do. We too have fallen into some of the behaviors that are described in the article, as much as we resent and dislike them.
It turns out that there are some very interesting economic, sociological, and psychologal reasons why the VCs fill a particular economic niche and why it very difficult to find alternatives. These reasons range from how many startups a person can be really involved in at a time, the economic incentives of associates to become partners, the pressures of repeatedly raising money for the next fund from publically accountable entities, the 'sharks' at the mezzanine rounds, etc.
As an example of one of these factors: It is common wisdom VC associate can't be meaningfully involved as an advisor in in more then 5 to 7 companies. I found this to be true in my own small company. Yet it is also true that 1 in 5 companies "break even" and 1 in 20 companies "makes the fund", i.e. pays off enough to pay for the fund. Even choosing better companies to start with doesn't necessarily improve the odds much as there are still significant "random" factors, especially if you invest early. Thus there are significant pressures on the VC associate to attempt to try to be involved with more then 5 to 7 companies, as it based on how he does with these companies that he will earn, or not earn, a right to be a partner when the next round is raised. This contributes to why VC associates often are spread far too thin, and why they don't want to invest "only" a couple of hundred thousand. Also, VC firms only make management fees on money after it is spent, and with the limits of how many people are required to supervise the investments they want to invest millions in each or they'd have to manage too many companies to use up all the money their fund has allocated. Another factor making it difficult is that you can't just invest in early rounds -- you have to participate all the way through else you risk a subsequent series C-D investor or "mezzanine" investor devalueing your participation. As a for instance, we invested significantly in a Series A round of a company that is doing reasonably well. However, they do need to raise more money now in a Series D as it looks like it will be a while before they can IPO given current market conditions. We can't afford to participate at this level (we only invest at early levels), and because of the funding climate, the lead of the Series D investor is converting all of us Series A investors to common stock. If we rally the series A investors to reject this (which is a right we have) it doesn't do us any good as it might cause the company to go bankrupt. So we have to accept it. So it isn't just the founders and engineers that are getting screwed, but also the early investors. If we were a large VC fund, we could participate all the way through and prevent such an occurrence, but then we'd have the pressure that the large funds have to invest only in larger chunks and we'd probably not have invested in this firm in the first place. There are many other reasons why VC behave the way they do that I've discovered over the last few years that are consequences of much more complex things then what this article describes. There are probably more that I haven't discovered yet. Yet like any engineer, I do have some ideas on how things might be done differently, but it requires tweaking some of the VC parameters in radical ways -- it is not a case where tweaking one variable will transform the system, it requires a major redesign of a new system. And like any new system, it will be difficult to test so it will be quite risky.Re:White fortress (Score:2)
News flash: Venture Capitalists bail out Australia, in exchange for a 75% share of the country, majority control of the legislature, and control of all top government posts. Elections have been canceled as a cost cutting measure.
Re:VC's are tarnishing their trade (Score:1)
Most people are honest in that they won't go out of their way to cheat or steal, however, when a record company executive or a VC presents them with a golden opportunity, the temptation becomes too great. I'm sure that allot of engineers who are approached by a VC already know that their idea will never make money or is unfeasable, and still they go forward with the VC. At the end of the day it all comes down to this: A reputation for cheating will always be overshadowed by the wild success stories of the few lucky people who managed to buck the trends and make big money.
Re:VC's are tarnishing their trade (Score:1)
I never said anything about a group of musicians under the exact circumstances that you lay out. I'm also well aware of the advantages a music publisher has in the creation of a contract over the musicians. That said, 22 year old 'adults' should have more sense than to sign any contract without first having their own attorney and accountant read and review it. If they can't afford their own attorney or accountant, they should walk away from a contract that they don't understand. Being blinded by greed seems a likely motivation for such an absense of common sense on the part of an artist to me.
If you sign a contract that's been put in front of you without the intent or talent to live up to it's terms, then you are cheating or stealing. This applies to a no-talent musician as surely as it applies to a no-talent startup. There is nothing "Amazing" about any of this, and I never said anything about a record company executive being blameless.