

"The End of Silicon Valley" Is Nonsense - eladgil
http://blog.eladgil.com/2012/09/enough-with-this-end-of-silicon-valley.html

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ChuckMcM
"Personal financial stability and past experience can go a long way for people
to take big bets."

Really liked that quote. One of the benefits silicon valley gets when it mints
a few hundred or so millionaires is that those people now go out a bit more
fearless.

Tom Lyon who is a serial entrepreneur once told me that you really needed
three wins, the first was you joined a company that taught you about what
being a tech company entailed, the second was a startup where you made enough
out of it that you could do a third where you could better control the
economics and the vision. There may be a number of attempts in that thread but
its really true.

A number of people I know seem to have various milestones for fearlessness,
but they roughly correlate to;

1) they own their house free and clear,

2) they have enough money set aside for their kids educations,

3) they have enough money set aside to keep them in Ramen indefinitely[1].

Each level brings its own level of fearlessness.

[1] generally the 'retirement' calculators ask you to predict when you're
going to die. So you take that number, the cost of paying taxes/insurance on
your house and your own health + ramen and that is your 'ramen retirement'
number. Note that you leave behind a giant asset (the house) so many folks
assume selling the house and moving to a smaller/cheaper place in that number.

~~~
001sky
This is a great post and a real eye opener.

Translation: In maths for SF

1) $1-2 million, minimum for a house for 4

2) $250K per kid x 2 = $500k, assuming public high school

3) Min $1 million per head, 50k pre tak 30-40k post tax

total: $3.5 million to $4.5 million, NAV ~= 5% pretax of $100m exit

Sorta-back-of-the-envelope

This is why you need N exits, not just 1

~~~
moocow01
Or just don't live in the SF / Bay Area. If you want to have a crazy runway
for your startup work towards paying off a 250k (or less) house with solar on
it just about anywhere else in the US. The counter-argument to this is that
being in SF,NY,etc gives you connections, opportunities, etc. but Id rather
just not have to worry about coming up with a sizable chunk just to make sure
my family has a roof over their heads.

~~~
001sky
Good post too, but this is only a ~21% reduction in the total (2.75 vs 3.5).
You're still looking at ~80% of the cost base. The neutral decision point is
only @ 25% increase in exit/success neede to make the switch to metro (80 to
100).

~~~
moocow01
That is true - there is no math to this one but I do know from observation
that if you have a decent roof over your head, running water and electricity,
decent transportation, an internet connection and a computer all "paid off"...
the rest of life can be lived well and paid for very very cheaply.

May be an entrepreneurial way to think about for those that are prone to being
a cheap ass like me

~~~
001sky
_various milestones for fearlessness_

Yes, some are only in mind-- including ability to overcome fear, in general

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NickKampe
No, it's really not nonsense at all. I honestly couldn't think of a worse
place to start a company than Silicon Valley, other than potentially a third
world country with no internet. Extremely high costs of living, constant
talent warfare, and absolutely terrible traffic at peak hours. Unless you're
venture backed, stay the hell away from the bay.

~~~
brador
Care to name a few better places?

~~~
cobrausn
I'll just throw this out there: Kansas City?

I am actually wondering if the Google Fiber initiative there will cause a
startup boom.

~~~
brador
Is fast personal internet really that much of a driver?

SV has the money, it has the talent, it has the beautiful weather. Yeah the
rent sucks, but that's the only downside I know.

~~~
jes5199
I hate SF weather. Foggy and cold year round. Not that it matters, startup
people never see the outdoors.

~~~
Domenic_S
SF != SV

~~~
jes5199
I'd rather live in a bad city than a nice suburb.

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IsaacL
Very well said.

I've been planning a blog post for some time on "hidden principles of Silicon
Valley"; basically the unsaid assumptions that the top investors seem to
follow but the startup peanut gallery don't grasp. Just little tidbits I've
gained from the writings of Peter Thiel, Paul Graham, Marc Andreesen, Mark
Suster, Ben Horowitz, etc.

One example: lots of people decry the trend for valley startups to burn cash
to grow market share. Silly startups, why can't they bootstrap? Why is
LinkedIn trading at a 300+ P/E ratio? But the hidden assumption (which may be
wrong) is that the winners of today's tech game will be around for a long
time, generating billion-dollar cashflows for decades.

Peter Thiel explained it better than I can:

"PayPal is illustrative. 27 months in, its growth rate was 100%. Everybody
knew that rate would decelerate, but figured that it would still be higher
than the discount rate. The plan was that most of the value would come around
2011. Even that long-term thinking turned out to undershoot; the discount rate
has been lower than ex- pected, and the growth rate is still at a healthy 15%.
Now, it looks like most of PayPal’s value won’t come until in 2020.

LinkedIn is another good example of the importance of the long- term. Its
market cap is currently around around $10B and it’s trading at a (very high)
P/E of about 850. But discounted cash flow analysis makes LinkedIn’s valuation
make sense; it’s expected to create around $2B in value between 2012 and 2019,
while the other $8B reflects ex- pectations about 2020 and beyond. LinkedIn’s
valuation, in other words, only makes sense if there’s durability, i.e. if
it’s around to cre- ate all that value in the decades to come."

It never fails to amuse me that the mean HN poster is actually quite cynical
about startups -- I think this is partly due to cynical people posting more.

~~~
001sky
So, how does this relate to PG's article: _Black Swan Farming_? There is a
huge difference in profiting from a stochasitic-but-diversified portfolio with
massive variance and extrapolating from the outlier data. The properties of
the outlier data, by definition, are not charachteristic of the data-set as a
whole. The properties of the outlier data are useful for talking about the
potential of future outliers and possible portfolio variance.

 _'The sink or swim strategy was successful for all 1% of the successes'_? [1]

Its easy to overgeneralize.

__________

[1] 'The sink or swim strategy was _not_ successful for all 99x1% of the non-
successes.'

~~~
JumpCrisscross
>" _The properties of the outlier data, by definition, are not charachteristic
of the data-set as a whole_ "

Graham's statement about three-quarters of the value of YC's $10 billion
portfolio being comprised of Dropbox and Airbnb counters this. It's the
difference between the probability density function and the aggregated
cumulative distribution function.

This is actually part of the founding logic of modern portfolio theory: let's
suppose all start-ups have a 1% chance of making it to a billion and a 99%
chance of going bust. From the start-ups' perspectives, the $1 billion exit
outcome is an outlier scenario. If I put a few hundred of these guys in a
portfolio, however, it would be _improbable_ for not one of them to Instagram.

This oversimplifies as it assumes simple distributions and pre-known
probability densities, but it illustrates one of the un-intuitive effects of
the way variances combine mathematically.

~~~
001sky
The counter-argument is that black swan is not a regular _gaussian_ style
outlier from a known distribution. Its better thought of a datapoint from an
<Uncertain> process, being mixed into your run of the mill vanilla
<stochasitic> one. Thats the issue -- I appreciate your comment making it more
clear. So, if we take the black swans and put them into a group, its not clear
what we have. Though it seems a stretch that they would be representative of
the vanilla process per-se.

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zwieback
A better title would be "The End of software startups in Silicon Valley Is
Nonsense". There are plenty of companies in the SV that will still be there
when the software startups are gone.

Also, behind the strawman arguments there are some hidden truths but they have
to be rephrased to be interesting, e.g. software isn't easy but it appears to
be easy so lots of people enter the field that shouldn't. Also, people should
be working on harder things but not for the reasons discussed in the article.

~~~
cli
Are there any good websites that cover non-software startups? As a physical
scientist/engineer in training, I am more interested in the "physics or
advanced materials" type of startups mentioned in the article.

