
As More Tech Startups Stay Private, So Does the Money - ranvir
http://www.nytimes.com/2015/07/02/technology/personaltech/as-more-tech-start-ups-stay-private-so-does-the-money.html?ref=business
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msgilligan
I started to read this article and saw no mention of Sarbanes-Oxley. I
searched for 'Sarbanes' and 'SOX'. How old is Farad Manjoo? How old is his
editor? Or does this cluelessness come from the filter bubble of working for
the New York Times?

~~~
bpodgursky
It's either uninformed or a hit piece, if it doesn't cite SOX as the main
cause. Either way adds nothing to the general public understanding.

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tinkerdol
> By relying on private investors for a longer period of time, start-ups get
> more runway to figure out sustainable business models

Can anyone explain, what is the rough amount of runway that a company _should_
need? For instance, are there rough estimates expected for when a company
should be able to reach profitability depending on product type?

I was watching the How to Start a Startup lecture on how to raise money
([http://startupclass.samaltman.com/](http://startupclass.samaltman.com/)) and
was astonished about how many rounds of funding VC's expect to give out after
seed funding (A, B, C, D rounds, the letters seem to keep going).

I'm thinking of bootstrapping a company and easily also see the appeal of
getting funding, in order to hire a team and get the product out faster. But
why are so many rounds necessary?

Is there some business or economics theory out there that would explain the
amount of runway needed for each business or product type? For instance, if I
were launching an ice cream truck tomorrow, I'd expect profitability in the
very short term compared to say, something like SpaceX.

~~~
zxcvvcxz
> Can anyone explain, what is the rough amount of runway that a company should
> need?

Depends on your goals. If you want to dominate the market and become a
monopoly, then you need enough to outspend all your competitors while
surviving. Meanwhile if you're starting a lifestyle business, you need only
enough to put a roof over your head and get some food.

> I was watching the How to Start a Startup lecture on how to raise money
> ([http://startupclass.samaltman.com/](http://startupclass.samaltman.com/))
> and was astonished about how many rounds of funding VC's expect to give out
> after seed funding (A, B, C, D rounds, the letters seem to keep going).

Because if VCs are funding a company, they want the company to be on the
former end of the spectrum I just described. Anything tech with network
effects demands a clear winner these days, there is such a huge difference
between a Facebook and a [insert 2nd place competitor here].

Think of it like an arm's race: the rounds are necessary because others are
raising the rounds. Others are raising the rounds to maximize the resources
they can throw towards winning the market exclusively. The underlying
principle that creates this dynamic are winner-take-all network effects, as
mentioned. People are going to open up only 1 app for a particular function,
is it going to be yours?

A lot of people talk about bootstrapping and "lean startup" and lifestyle
businesses with great praise. And for a particular set of goals, these are
excellent strategies. But there's also a sense of looking down on these huge
VC-funded mammoth companies trying to dominate the market ("they don't even
build elegant tech, they just throw tons of money at the product").

But see this is where the real War of Business is being fought, that's where
Ubers and AirBnBs are being created. Either one of those could've stayed a
small niche local lifestyle business.

You might find interesting the following Ben Horowitz article:
[http://allthingsd.com/20100317/the-case-for-the-fat-
startup/](http://allthingsd.com/20100317/the-case-for-the-fat-startup/)

~~~
tinkerdol
Thanks for the response!

Let's assume we want to dominate the market and not create a lifestyle
business.

Isn't it a benefit of a more lean/bootstrapping style to be forced into
finding a product people love faster (rather than burning money marketing the
product)?

For instance, what about eBay as an example of a side project that really took
off. Are such instances really anomalies?

~~~
zxcvvcxz
Well I think it's pretty standard for these types of companies to start as a
small project, as a founder's inkling of something people would want. It's not
like millions of VC money is being raised before that even happens. Except for
some cases of stupidity, like Color or Clinkle; those are the anomalies IMO.

What we're discussing is where to take the venture/project after figuring out,
"Holy shit, there are probably millions willing to pay money for this, we've
hit gold." Most ventures don't have that moment - or even worse, miss that
realization if it's true.

So the smart ones start arming up -- getting those big VC dollars to grow the
venture as fast as possible before someone else realizes what they've done and
tries to do the same. I can pretty much guarantee you there existed direct
AirBnB competitors around 2010 or so. But how many of these got funded by
Sequoia? How many had a global vision they had to make happen? This money, and
the strong status signal of investor confidence, attracted talent, which let
them continue building and outpace all of their competitors whom we've never
even heard of.

Anyways, that's what I've observed in a nutshell: hit on something big with
experiments at a small scale, and then fund like there's no tomorrow. Because
for all but one of these type of companies, there isn't.

------
nrao123
I don't get it. A lot of people (e.g. a16z) are saying that late stage
financing / "private IPOs" are keeping the wealth in private investors instead
of public investors when there is a public IPO.

But- the investors in these "private investors" such as Hedge Funds, PE funds
or even late stage mutual funds (Rowe Price / Fidelity...) are LPs such as
pension funds. The money in these pension funds are that of the common man
again right?

So the common man is taking a longer term view & getting a better return
through alternative investment vehicles (PE funds etc).

That is a good thing overall right? We complain about public markets being
short term. But then we also complain about common people taking a long term
view via LPs investing in late stage funding.

From the article: _If the private investors are wrong, employees, founders and
a lot of hedge funds could be in for a reckoning. But if they’re right, it
will be you and me wearing the frown — the public investors who missed out on
the next big thing._

~~~
prostoalex
1) The set of people who have access to venture capital through pension funds
is smaller than the set of people who have access to public stock market.

2) Historical figures of stock market performance include such breakaway
successes as MSFT and AAPL with the stories of "if you bought 100 shares of X
on the day they went public, it would be worth [high dollar amount] today".
Remove the outliers responsible for such gains, and general public will
respond by removing liquidity from public markets until it becomes more
attractive.

3) Things like DJIA and S&P 500 for better or for worse are viewed as proxies
of US economic health, and are frequently used as underlying metrics of
investor optimism, etc. Flatter indices are boring and are frequently
interpreted as "going nowhere".

------
rm_-rf_slash
Maybe it's just me but I've always felt that the corporation should be owned
by the corporation. There is something disingenuous about founders who do
their job for $1 a year cause they're multimillionaires that own 10% of the
company. What happens 100 years down the road? Your descendants - assuming
they haven't squandered their inheritance and aren't interested in being a
part of a corporate dynasty - will put every ounce of pressure on the company
to increase profits, and that means hefty compensation packages to attract
executives while midlevel white collars have to fight tooth and nail for a
measly hundredth of a percent in options.

~~~
orkoden
Welcome to the exploitative system that favors the rich: capitalism

~~~
rebootthesystem
These comments are ignorant beyond comprehension. Go start a non trivial
company with your own money and run it for ten years. Then come back to see
just how utterly ignorant these comments will sound to you.

~~~
orbifold
Capitalists think that because they take on the risk, it is somehow morally
justified to exploit others for wages. It is pretty obvious that it isn't much
better than feudal indentured servitude and that ideally in any enterprise the
risk and reward would be shared by everyone proportionally to their
contribution.

~~~
rebootthesystem
> Capitalists think that because they take on the risk, it is somehow morally
> justified to exploit others for wages.

I don't know what you are smoking but you better stop.

Maybe you are trying to be funny. I don't know.

Such horse shit.

------
mparr4
This article mostly seems to be about companies going public later than they
might have a few years ago. What about companies that never go public?

To ask an admittedly naive question: is it possible to get funding and remain
private? Does that even make sense?

Obviously investors want to make money, can profits at a private company serve
that function? Or are tech investors mostly (only?) interested in > 100x ROIs?

------
sjg007
What probably matters most for many people here:

“We probably need to fundamentally rethink how do private companies compensate
employees, because that’s going to be an issue,” said Mr. Kupor, of Andreessen
Horowitz."

Many of these private IPOs restrict employees to selling shares back to the
company at say 10% of the vested allotment. This forces people to the
secondary market. Also new language in options agreements try to prohibit
secondary market selling.. So it is basically a mess and practically
impossible to get information.

At least most of the unicorns have extended the 30 day exercise after you
leave issues. Don't join a startup that doesn't give a longer (e.g 2-10 year)
time frame for buying your vested options. Odds are post series A you won't be
able to afford them unless offered a private liquidity event and then you can
only sell some small percent anyway.

------
amirmc
_" If you can get $200 million from private sources, then yeah, I don’t want
my company under the scrutiny of the unwashed masses who don’t understand my
business," said Danielle Morrill"_

Wow. I get that private money is easier to deal with but disparaging the
public markets as 'unwashed masses' seems rather uncouth. I expect leading a
public company requires quite a different skill-set than a private company and
the 'scrutiny' is a necessary part of that (information release etc).

~~~
mattmanser
It's a disturbing trend in tech that's going on.

Here's an upvoted, but vile, close-minded, comment from another thread:

 _The [general populace] are lazy, and if given money, will sit watching
reality TV and stuffing their face with ice cream._

The arrogance of techies is getting obscene, but the reality is we lucked out
on enjoying mucking around with computers and now we're starting to believe we
deserved it all along...

~~~
benihana
I find it interesting that two quotes from individuals is enough to get you to
think all techies think the same.

~~~
mattmanser
They're examples, it's more a reflection of the general tone of the discussion
the last few years.

------
DiabloD3
So, the article is demonizing companies that never become publicly traded?
Thats rather disgusting in of itself.

~~~
solve
What's equally disgusting is that all of these VCs are upset that the more
sophisticated, harder working, more data-driven investors, who used to only be
on wall street, are now moving to the earlier and earlier stages, taking away
the easy money that the top VCs have enjoyed for so many years.

No more VCs sitting on the beach while collecting fat checks from their carry
percentage and toying with companies, sometimes even hurting companies for
their own personal enjoyment, at the expense of the LPs.

VC is changing fast, and today's VCs are very upset about it.

------
michaelochurch
I'm of two minds about this.

On one hand, I sympathize with Ms. Morrill's position. I could see myself
running a 50-person tech company. By the time it was public, I'd be looking
for a replacement and planning to cash out. I hate having to justify my own
work to people less intelligent than I am, and that becomes your life when
you're the CEO of a publicly traded company.

"Unwashed masses" was off the mark and probably unneeded-- the actual enemy
isn't 100-IQ average Americans (who, since it's 2015 and not 1347, are
probably as clean as we are) who prefer fishing over running tech companies--
no one has a problem with them-- but management consultants and VC-land
celebrities who _think_ they're what I actually am (Dunning-Kruger) and are
just so hilariously _not_ , but somehow end up in charge despite their
intellectual mediocrity. Still, I understand her sentiment _completely_ and I
feel the same way. If I'm CEO, then as soon as my job is begging for
permission to do great work and justifying time and expense to inferior copies
of myself who have no insight but all the power, instead of just fucking doing
great work, then please cash me out and fire me.

On the other hand, I don't think that the VCs are, on the whole, better than
the mainstream business elite. Person by person, they're worse: less
intelligent, less capable, far more immature, and a hell of a lot worse in
terms of organizational and social insight. The steel company CEO may not
understand Haskell, but he fucking knows how to lead people and run a complex
human organization. The typical Sand Hill Road VC doesn't know either and is,
therefore, pretty fucking useless except for the fact that he's a gatekeeper
to the man-child oligarchy that holds all the cards. The main benefit that you
get as a private company (cf. Ms. Morrill) isn't that you're accountable to a
higher quality of people (because VCs are not that) but that you're
accountable to _fewer_ people and, therefore, have a better chance of drawing
only aces. If you're accountable to as many people as you are, once public,
the probability of drawing all aces becomes really low-- and the 3's and 4's
(which are found in both decks) often have better social skills and become the
dominant decision-makers.

The major reason why VCs want to keep companies private, furthermore, has
nothing to do with "long-term vision". Sand Hill Road is essentially taking
equity-market strategies (namely, insider trading and market manipulation)
that have been illegal for nearly a century on the public market, and applying
them to private markets. If you use inside information to beat up the public
market, you go to jail. If you pick up a phone and tell your buddies to dump
their Quuxbin stocks all at once you can corner it on the cheap and put your
underachieving, favor-dependent friends into executive positions... then
you're guilty of market manipulation and go to jail. That kind of stuff
happens (legally or at least quasi-legally) all the time in Silicon Valley.

The Sand Hill Road cartel (or, as I prefer it, man-child oligarchy) shows us a
parallel universe in which pump-and-dump is the norm and businesses soar or
fail not according to market demand for their (typically uninspiring)
products, but based on the fluctuating needs of self-interested, careerist
investors. This is not only ethically problematic, but it also contributes to
the geographic concentration of technology funding, which has become toxic
(both for the residents of the Bay Area, who pay obscene rents, and for the
capital-deprived "flyover" rest of the country). See, anyone who wants to know
why VC is so Bay Area-centric need only pay attention to what the VCs are
actually doing. Because so many of the conversations that VCs have would
utterly fucking ruin them if ever printed, they _have to_ work face-to-face.
That doesn't mandate a specific area (e.g. San Francisco) but it does require
geographic concentration.

