
The Back to the Future Arbitrage of Silicon Valley - isalmon
http://blogmaverick.com/2014/03/19/the-back-to-the-future-arbitrage-of-silicon-valley-and-what-it-will-take-to-beat-it/
======
aliston
So, Cuban is saying Silicon Valley's advantage is the ability to create exits.
What's the most common exit path? If you've got the right investor pedigree,
it's to flip your company to Google, Facebook, Yahoo or another
Sequoia/Accel/Kleiner/Andreessen company. I think that's one of the biggest
reasons its difficult to recreate a Silicon Valley elsewhere. SV is a much
more incestuous process than the meritocratic one its often portrayed as in
the media. Most Sequoia companies don't really "fail" \-- they get acqui-hired
as a favor/kickback because its better for Sequoia's portfolio and doesn't
really impact the acquiring company. In other parts of the country/world where
that's not possible, there is a much greater risk for entrepreneurs to start
companies around things like social networking apps. Also, kind of ironic to
note that Cuban made most of his money by selling his company to Yahoo at the
peak of the first internet bubble. A few years later, his company effectively
ceased to exist -- not exactly what I'd call creating long-term value.

~~~
IBM
I'm amused by it. It's a transfer of wealth from shareholders of those
companies to founders and VCs. These are also the companies with dual class
shares designed to keep control in the founders' hands. They all say it's to
be able to focus on the long-term, but really it has bred empire building and
poor stewardship of the shareholder's capital. As a result, their interests
are less aligned with shareholders' compared to if all shares had the same
voting rights.

An exception to this is Apple. They have one class of shares and management
have been conservative stewards for the life of the company. They never make
large acquisitions, which limits the opportunity for destruction of
shareholder value, and all acquisitions are made with the purpose of enhancing
a product or some other core of the business. It's in the company's culture to
have organic growth. They either have it or they flounder.

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ValG
He makes an assertion that isn't true. That it's just as possible to raise
money somewhere else other than Silicon Valley. Is it possible? Yes. Is it as
easy/fast/convenient? Not even close. I've tried doing a startup in Michigan.
Conversations with investors lasted months and they still wouldn't commit. In
the valley, you can get a yes after meeting 2. Can you raise money outside of
SV? Yes (in some places easier than others) but if you have to spend a bunch
of your time on investor meetings instead of on your customers, it just makes
it that much harder to grow your business. Silicon Valley also provides other
intangibles that other locations don't (eg lots of early adopters that will
give you feedback on your product, easy access to talent, etc...). My opinion
is that it's still the best place to do a startup. (Granted I've only tried in
Michigan before)

Ohh and the exit scenario that he mentions, this is pretty accurate from my
observations and SV/VCs here are really good at this. A lot of personal
relationships that help facilitate this.

~~~
drone
Your assertion that people can't raise money easily elsewhere is wrong. Just
because you had one singular data point about your own experience does not
create a truth, nor does my experience in raising a large-sized convertible
note in just five weeks with only four investor meetings in the deep south
make that a truth either.

Then again, I had already made most of those investors good money, and have
friends who are professional fundraisers. Your connectedness counts
everywhere. Those SV intangibles are largely meaningless to my business, as
there are more of my kind of customers in my local city than in SV, a lot
more.

~~~
GVIrish
He didn't say you "can't" raise money elsewhere, just that it is more
difficult. Are you arguing that it is just as easy to raise money elsewhere as
it is in SV?

~~~
drone
"He makes an assertion that isn't true. _That it 's just as possible to raise
money somewhere else other than Silicon Valley. Is it possible? Yes. Is it as
easy/fast/convenient? Not even close._"

His assertion was based on his personal experience, as further detailed. For
some of us, it is far easier to raise money locally than in Silicon Valley.
Therefore, any statement which states it is categorically "not even close"
without taking into account the target for the statement and their given
situation must therefore be false.

Furthermore, the assertion of the author he cited was that it's _just as
possible to raise money_ , which is the statement he derides as false, and
then categorizes his own statement of false by saying that while the author is
correct, that it's "just as possible," it's "not as easy," which was not the
assertion of the posts author.

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arbuge
His thesis that Silicon Valley is good at exits, but unremarkable at capital
raises seems to be an alternate reality to me.

Hard data on raises is everywhere - see for example the PWC moneytree report.
The Valley has consistently done as much as the rest of the country combined
(approx.) for decades now.

Exits on the other hand are fuzzier and tend to come from everywhere. IPOs for
example are really more made in New York than the Valley if you think about
it. Acquisitions are more Valley-centric only because tech companies tend to
acquire other tech companies, and the Valley has more of them.

------
temphn

      What Silicon Valley does better than anyone is create 
      exits.  They know how to get people who they have made 
      money for to turn over a lot of that money to buy the 
      companies they have invested in. They know how to put on a 
      show to get a company to an IPO. They know how to go out 
      and get hundreds of millions of dollars to bridge companies 
      with 10s of millions in revenues to their IPO and more 
      importantly to make sure the IPO happens.
    

This is Mark Cuban. He sold Broadcast.com at the height of the dot com bubble
for 6 billion dollars. 520,000 users sold to Yahoo for $11,000 apiece.

[https://www.quora.com/What-was-Broadcast.com](https://www.quora.com/What-was-
Broadcast.com)

~~~
adventured
Pretty sure everyone here knows how Mark Cuban became a billionaire. Who
better to speak on the topic accordingly?

------
ChuckFrank
I think this is Cuban's way of saying "Hold on, I see now that compared to the
exits we are heading towards, the valuations are not to big." Here's the
problem with that type of thinking - we can always readjust our valuation
expectations to be in line with increased valuations. Every bubble does that.
It becomes the 'new normal'. But it's still not necessarily true. Regardless
of SV's success at crafting exits, valuations might still be too high. Both
statements can be true.

------
majani
This reads like a satire considering Cuban made his money doing literally
everything in that article, except the Stanford bit. I spent the whole article
waiting for the point where he would say, "just kidding, don't hate the
player, hate the game."

This is just your typical rich guy who makes a boatload of money, turns around
to say, "money isn't everything," then hops into his G5 airplane to check if
his investments have yielded 10x. Hypocritical BS

~~~
jonnathanson
That doesn't invalidate his argument, though. If anything, you could argue
that he's _more_ qualified to describe these things, because he's played the
game a few times. He's been on the inside. He knows the moves and the
motivations.

One can be a hypocrite and still be correct. FWIW, I don't see anything along
the lines of "money isn't everything" in his post.

~~~
majani
in this post, he's telling people not to chase big exits, yet elsewhere, he is
spotted aggressively flossing his big exit money:
[http://m.youtube.com/watch?v=ITkYtwmM-
OU&amp;ctp=CAIQpDAiEwj...](http://m.youtube.com/watch?v=ITkYtwmM-
OU&amp;ctp=CAIQpDAiEwjGuZilk6O9AhVCwMIKHfUIAFU%3D&amp;gl=KE&amp;client=mv-
google&amp;guid=&amp;hl=en-GB)

------
briantakita
Hollywood's practice of using independent talent is a better model for
technologists than the standard corporate employee/employer relationship.

It allows more flexibility & creative potential. It keeps Hollywood in a
leadership role over many fashion-driven industries.

As the technology industry becomes more about abstraction, it also assumes
more characteristics of a fashion-driven industry. Having independent creators
will only increase innovation and market liquidity.

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midas007
Lol @ Color reference. Whether WhatsApp, SnapChat are in league with
Broadcast.com, The Learning Company, Geocities or Exite is debatable.

I'm still trying to wrap my head around how Groupon justifies any valuation
considering how much they fritter away on staff T&R (flying non-local sales
staff to other cities to spend 3 hours with one restaurant owner).

------
minimax
_They know how to get people who they have made money for to turn over a lot
of that money to buy the companies they have invested in._

I'm just trying to parse this. Is he saying that VCs earn money for their LPs,
and then turn around and sell portfolio companies to the same LPs?

~~~
fleitz
To put an example on it, I think he's talking about Facebook buying Instagram,
and that sort of thing.

~~~
sjg007
In some sense. Of course I'm sure they had multiple suitors. Instagram has a
huge user/traffic base.

------
vonnik
sounds like someone's having a hard time investing and hiring.

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michaelochurch
So, what's propping all of this up is the immense size of a typical startup
acquisition. These acquisitions are typically priced at $5 million per
engineer for an acqui-hire, and more if there's an actual product. These
numbers are consistent to scale: for an established, public tech company to
have a market cap of under $1 million per employee is unsuccessful.

Think about that. A mere _relationship_ (which she can end at any time) with
an _average_ engineer (most startup engineers aren't anything special, as
startup success these days has more to do with marketing and sales than
technical excellence) or technical person is worth _several million dollars_.
Why?

Companies like Yahoo buy startups at a panic price: several millions of
dollars per head. That's the price of mostly _mediocre_ talent. Also,
acquisitions are fraught with peril. Good people tend to bounce and bad people
tend to stay. Huge tech companies still do them. Why? Because their middle
management filters are so broken they can't recognize talent at the bottom.
Engineers who are just good enough to support a half-decent sales/product teem
are, along with that sales team, valued at $2-5 million per head.

And we still don't think of ourselves as exploited, when we suffer under
closed allocation for a comparative pittance?

These startups are an attempt to capture the immense surplus value that we
(especially the top 10% of us) create. They used to enrich... engineers and
makers, as well as investors. They now deliver our surplus value to... friends
of investors (hired in as executives, or made founders) as well as investors.

~~~
yourapostasy
Would you say most engineers are used to discussing compensation in annual
terms, while buyouts are usually computed in forward-projected earnings terms,
anywhere from 3-8 years for most small buyouts depending upon various factors?
If so, then a $2-5M per head figure works out to $667K-1.67M per engineer per
year for a 3-year projection, and $1.67M-625K per engineer per year for an
8-year projection. Even factoring in the overhead costs (an additional 50-100%
bump to the annual figure), that is still a healthy amount of surplus capital
in the picture that engineers should keep in mind when getting recruited, and
should be negotiating for in prudently-structured stock grant terms if not in
cash.

So it isn't $acquihire_price_per_engineer - ( $my_annual_compensation_pkg +
$overhead ) = OMFG!, but it still pencils out to a healthy amount per year
anyone who is a principal contributor should be aware of.

