Comments on: Given the odds, is taking venture capital the best way to get rich? http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/ Handmade Software Experiences Fri, 26 Feb 2010 05:57:15 -0800 http://wordpress.org/?v=2.8.6 hourly 1 By: Dan http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60337 Dan Fri, 05 Jun 2009 06:02:45 +0000 http://www.jacksonfish.com/?p=2151#comment-60337 A few considerations: One important variable is that with VC, you're playing with Other People's Property. If you have an idea that requires a few years to break even and a few people to work on it, you can risk a half mil of your own money (assuming you're independently wealthy) or you can do it on someone else's dime. If it fails, you've drawn a salary for doing something fun; if it succeeds, you get to share in the upside. You compare taking VC to playing the lottery. That's fair in many ways. But you say: "I tend to not factor in the money that you get from the mythical huge exit because they’re so rare." While uncommon, those results are so huge that they do play an important part in the expected returns calculation - just like in the lottery. Finally, let me point out that you've built a wonderful services company that is, I think, moving towards building products. As compared to product companies, service companies are generally much faster to get to cashflow breakeven and not venture backed. These points are correlated. It's inherently riskier and more expensive to start a company that builds products because you don't have a customer who's promised to pay you for your work. Exceptions abound, but it's a useful starting point to "should I consider VC". If one of your goals is to build a product, the answer is more likely yes than if your answer is to serve really delicious vegan desserts, for example. A few considerations:

One important variable is that with VC, you’re playing with Other People’s Property. If you have an idea that requires a few years to break even and a few people to work on it, you can risk a half mil of your own money (assuming you’re independently wealthy) or you can do it on someone else’s dime. If it fails, you’ve drawn a salary for doing something fun; if it succeeds, you get to share in the upside.

You compare taking VC to playing the lottery. That’s fair in many ways. But you say: “I tend to not factor in the money that you get from the mythical huge exit because they’re so rare.” While uncommon, those results are so huge that they do play an important part in the expected returns calculation – just like in the lottery.

Finally, let me point out that you’ve built a wonderful services company that is, I think, moving towards building products. As compared to product companies, service companies are generally much faster to get to cashflow breakeven and not venture backed. These points are correlated. It’s inherently riskier and more expensive to start a company that builds products because you don’t have a customer who’s promised to pay you for your work. Exceptions abound, but it’s a useful starting point to “should I consider VC”. If one of your goals is to build a product, the answer is more likely yes than if your answer is to serve really delicious vegan desserts, for example.

]]> By: Rajat Arya http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60325 Rajat Arya Tue, 02 Jun 2009 22:27:39 +0000 http://www.jacksonfish.com/?p=2151#comment-60325 Great post Hillel. David Heinemeier Hansson at Startup School 08 - something similar - in terms of attacking the Fortune 5,000,000 instead of trying to create the next wave. Check out his presentation here: http://www.omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08 I don't agree with everything DHH has to say but this presentation is absolutely correct. Great post Hillel.

David Heinemeier Hansson at Startup School 08 – something similar – in terms of attacking the Fortune 5,000,000 instead of trying to create the next wave.

Check out his presentation here:
http://www.omnisio.com/startupschool08/david-heinemeier-hansson-at-startup-school-08

I don’t agree with everything DHH has to say but this presentation is absolutely correct.

]]> By: Brad Hefta-Gaub http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60324 Brad Hefta-Gaub Tue, 02 Jun 2009 21:26:19 +0000 http://www.jacksonfish.com/?p=2151#comment-60324 Another great post Hillel. Big props to Hans Solo too, for coming out his Carbonite deep freeze and laying some of his wisdom on us. :) WRT Erik's comment, I think this is a classic misreading of Hillel's argument. He's not saying that you can make a business work on no capital. And he's not saying that all business require the same amount of capital. If you have a business that requires large amounts of capital to be successful, then you probably DO HAVE TO look into capital sources like VC. But I would say that as it relates to web software, more and more businesses are able to be created on smaller and smaller amounts of capital. There's a great deal of evidence to support this perspective. Another great post Hillel.

Big props to Hans Solo too, for coming out his Carbonite deep freeze and laying some of his wisdom on us. :)

WRT Erik’s comment, I think this is a classic misreading of Hillel’s argument. He’s not saying that you can make a business work on no capital. And he’s not saying that all business require the same amount of capital. If you have a business that requires large amounts of capital to be successful, then you probably DO HAVE TO look into capital sources like VC.

But I would say that as it relates to web software, more and more businesses are able to be created on smaller and smaller amounts of capital. There’s a great deal of evidence to support this perspective.

]]> By: Ron Kornfeld http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60323 Ron Kornfeld Tue, 02 Jun 2009 21:16:39 +0000 http://www.jacksonfish.com/?p=2151#comment-60323 It's the VC anti-dilution and liquidation preferences that make moderate exits (the most likely scenario) a bust for the common shareholders (founders and employees). And, since VCs need a liquidation they will never let you distro cash as you have described. You can point to past successes and see the role that VC money played but that's a trailing indicator. For most web/tech/social companies of the present (and future) more modest capital raises and practical liquidity models utilizing angel money will drive the best outcomes for the team. It’s the VC anti-dilution and liquidation preferences that make moderate exits (the most likely scenario) a bust for the common shareholders (founders and employees). And, since VCs need a liquidation they will never let you distro cash as you have described. You can point to past successes and see the role that VC money played but that’s a trailing indicator. For most web/tech/social companies of the present (and future) more modest capital raises and practical liquidity models utilizing angel money will drive the best outcomes for the team.

]]> By: Mark Essel http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60321 Mark Essel Tue, 02 Jun 2009 10:46:38 +0000 http://www.jacksonfish.com/?p=2151#comment-60321 I would imagine specific businesses need to "fast track" their development to beat competitors. Outside angel/venture money helps make this happen by allowing a startup to attract effective talent. Nowadays it is much more possible to start out with just your spare time and a few grand for legal expenses to get the company breathing, but if you look at the largest and most successful companies you'll see that there was a method for attracting outside talent in sufficient quantities to tip the industry in their favor. I would imagine specific businesses need to “fast track” their development to beat competitors. Outside angel/venture money helps make this happen by allowing a startup to attract effective talent. Nowadays it is much more possible to start out with just your spare time and a few grand for legal expenses to get the company breathing, but if you look at the largest and most successful companies you’ll see that there was a method for attracting outside talent in sufficient quantities to tip the industry in their favor.

]]> By: Dharmesh Shah http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60320 Dharmesh Shah Tue, 02 Jun 2009 05:52:30 +0000 http://www.jacksonfish.com/?p=2151#comment-60320 Great topic. The E.V. (expected value) for founders of venture-backed startups is actually pretty low given the low probability of a high-value exit. The numbers I've read in the past is that the founders of venture-backed startups that go through about 3 rounds of capital wind up with about 6% of the equity (on average). Great topic.

The E.V. (expected value) for founders of venture-backed startups is actually pretty low given the low probability of a high-value exit.

The numbers I’ve read in the past is that the founders of venture-backed startups that go through about 3 rounds of capital wind up with about 6% of the equity (on average).

]]> By: Hans Solo http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60318 Hans Solo Tue, 02 Jun 2009 02:52:21 +0000 http://www.jacksonfish.com/?p=2151#comment-60318 Never tell me the odds Never tell me the odds

]]> By: Erik http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60317 Erik Tue, 02 Jun 2009 02:05:44 +0000 http://www.jacksonfish.com/?p=2151#comment-60317 What if you won't survive without VC money? What if the competition is faster because they take VC? What if the competition has more opportunities because of the connections of VC? If you can build a business the provides you with 500k pa for the rest of your life, congratulations. But how high are the chances that you business will be around for such a long time - especially if you happen to be a tech startup? What if you won’t survive without VC money?
What if the competition is faster because they take VC?
What if the competition has more opportunities because of the connections of VC?
If you can build a business the provides you with 500k pa for the rest of your life, congratulations. But how high are the chances that you business will be around for such a long time – especially if you happen to be a tech startup?

]]> By: Dave http://www.jacksonfish.com/blog/2009/06/01/given-the-odds-is-taking-venture-capital-the-best-way-to-get-rich/comment-page-1/#comment-60316 Dave Tue, 02 Jun 2009 01:11:13 +0000 http://www.jacksonfish.com/?p=2151#comment-60316 Amen. I founded two companies (not enough for a good sample, but...) With the first, we took venture capital. Taking VC made our lives easier in the process. We took nice salaries, vacations, etc. But it failed. And in a pretty painful way (part of taking venture capital is ramping up to large numbers of employees; less fun when you have to lay them off). The second was mostly bootstrapped (I took a little angel money from some people we knew). We were acquired. For less than $10M, but nonetheless, enough to be happy with the outcome. I now have a small business that generates some cashflow without too much involvement on my part. The big secret: The first million changes your life. The second doesn't. I suspect $100M isn't that different from $1M. So why take on that kind of risk? Amen. I founded two companies (not enough for a good sample, but…) With the first, we took venture capital. Taking VC made our lives easier in the process. We took nice salaries, vacations, etc. But it failed. And in a pretty painful way (part of taking venture capital is ramping up to large numbers of employees; less fun when you have to lay them off).

The second was mostly bootstrapped (I took a little angel money from some people we knew). We were acquired. For less than $10M, but nonetheless, enough to be happy with the outcome. I now have a small business that generates some cashflow without too much involvement on my part.

The big secret: The first million changes your life. The second doesn’t. I suspect $100M isn’t that different from $1M. So why take on that kind of risk?

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