So anyone thinking that they're going to get much liquidity as a private company founder should think again. If the Snapchat and Twitch guys were rejected, the odds are not good that you will be the exception.
The category of VC that wants founder secondary and the category of VC that likes loss leading consumer facing businesses are not well aligned.
You know, kind of like how Bernie Madoff took hundreds of millions from established, regulated entities because the "word on the street" was he was, well, just front-running. Though illegal, that was an acceptable explanation for the consistent returns that prolonged a dirty business model. Well, we've learned how that all turned out.
Is there a moral to the story? Probably, but I'm not sure the startup culture would like to have to start questioning "angels" and their cohorts. YMMV.
You can certainly fool one.
Same goes for slack.
The real value in these firms is not the code, but the employees' ability to execute on the entire business idea that their code supports.
The question isn't whether VCs are brilliant according to some absolute metric. The question is whether they deploy capital better than random chance. The numbers show that top ten VCs consistently do.
Perhaps the comparison should be against the index.
If you have enough people flipping coins you're bound to end up with some people who appear to have significant skill in consistently flipping heads in your pool of coin flippers. (Especially if the pool tends to replace people who don't flip heads in their first couple of tries with new entrants)
It's arguably the Texas sharpshooter fallacy because we define "top VCs" after the fact by looking at their past returns, rather than identifying the "most talented VCs" from a very early stage. Perhaps identifying the "crack shot" from a blindfolded firing squad would be a better analogy.
It could be that 0% of top VC returns are explained by this; I'm curious, though.
My guess is, most of it.
If you have enough gamblers in a high stake casino where the house hasn't stacked the deck, some of them will seem to consistently win in comparison to the other players.
Similarly, a very small percentage of VCs and other active investors consistently beat the market. A percentage so small I'm not sure anyone can statistically say they are doing so through skill.
Similarly, your argument is the top 10 are consistent. Yes. And the top 10 aren't a statistically significant sample in a market of thousands of investors.
Actually, it doesn't. The top 10 VCs aren't static and unchanging.
Grow the player base, increase the number of predictions, you'll end up with some real super-stars who just go on winning. They'll probably write books and lecture about their techniques. Right up until the moment they lose. Kind of like hedge fund managers.
I read this example in a book or article, but I can't remember what that was called.
With 1,000,000 people predicting 100 coinflips each, the top ten had an accuracy of:
He sent different predictions to different people, some saw his predictions come true, and he sent more letters to all those people. And then repeated that, eventually narrowing it down to one person, who saw week after week correct gambling predictions, and really believed he had a system for winning.
She borrowed family money to bet big - then he revealed that she was the result of survivor bias and he had no system.
The Romans considered luck to be an important trait. When regarding military leaders, they considered luck to be even more important than skill. It meant that the gods favored the lucky person.
Julius Caesar was a skillful general, but he was even more admired for his incredible luck. There were many times where he was almost beaten, yet he got some lucky break that allowed him to be victorious.
It's harder to model with VC's because they are measured in rewards that get exponentially better with success (money) and are self-reinforcing (better deals from recognition). My guess is that they figured out how to eliminate the absolutely horrible ones and got lucky enough times to have the best deals come to them.
That does not describe Berkshire Hathaway at all.
That is the key. And 'well enough' can be a pretty tough hurdle for your typical fast growing start-up-without-a-business-model. Even though it seems to be all about growth (which I disagree with in part) growth by itself does not pay the bills. So you may be firing on all pistons and still find that you can't sell your stock at all.
Zuck's not trying to make small side investments personally that might enrich him but would certainly cause questions of conflict of interest with his CEO role at FB.
It's pretty common for companies to get minority stakes in competitors to get an in. Granted that is much more common in the public sector and sometimes sews the seed for a hostile takeover. This is why the snapchat board would never approve the deal; but the fb board would.
Do you have an example of this? It will be conflict of interest and may bring anti-trust issues. No competitor will allow access to confidential information and board proceedings to be observed by competitor.
I have only seen this happening when two companies settle some legal claims (ex: QTM-Data Domain) or form partnership (not competitors, ex: MSFT-FB) when one party is private/startup and other public. Typically public company will divest the stake when startup have IPO.
Also, Jos A Bank's takeover by Men's Warehouse, facilitated by minority owner Eminance Capital.
(1) of all startup's started by people who working in the industry, quit FT jobs to do startup or put in serious moonlighting hours in startup; total earnings - opportunity cost, annualized:
(total income from startup - opportunity cost of hours worked on startup) / years spent
Maybe this data-set should be split further into bins of founders whose last title prior to startup were only individual contributors, or were executives, their age and pedigree etc.
Would love to see the distribution + standard deviation say, for computer programmer who quits the job to do a startup would gain or lose in earnings per year.
(2) of funded all startup; the alpha of investment: total return on investment - (S&P500 Index return in duration of funding to IPO/exit) / (S&P Index Return)
Maybe this data-set should be split further into bins of people involved: founders, first 10 percentile employees by join date, second 50 percentile employees and so forth...
Would love to see the distribution of return on investing in startup's as an investor vs. investing in S&P500.
The middle is quite narrow, it's good money for a relatively large number of people but it is still a very small fraction of the total number that 'went for it'.
Still, better to try and fail than never to have tried, worst case you'll learn more in 3 years than you'd otherwise learn in your whole career.
As a founder, your job is to find your unfair advantage and execute on it. Startups that successfully find a valuable secret and exploit it become worth billions. Startups that have no such advantage usually die.
I thought the article was getting at this, but it seems like a lot of the folks here missed it. Twitch succeeded because, as justin.tv, they were in a position to notice rising demand for gaming livestreams. And then when they did, they executed against it very effectively - look at Emmett's user interview lecture for how they systematically gathered feedback from prospective users to convert them to current users. 
That's what Justin's talking about when he says "Trust your metrics and your growth." They had an information advantage over VCs - there was very good reason for believing VCs were ignorant there, because in this case, they were.
So, for an alternative view:
This is not an unfair advantage at all. I was in exactly the same position. We however thought that having game sessions streamed was terribly boring (none of the people in our office were gamers), and so, instead of catering to this niche (which I'm sure hit us well before it hit justin.tv simply because we started much earlier) we threw the gamers out and concentrated on the people.
They found another home and Justin absolutely ran with it, he recognized the opportunity that we squandered and I'm very happy that he made it.
There is absolutely nothing unfair about any of this.
And VCs were already funding fantasy sports, casual gaming and other game related activities, they just never made the link with screencasts that Justin did.
But long before then they already won the lottery in the sense that they got more money to work with than anybody in the space up to that point. The biggest deal in that space up to then was probably spotlife, a Logitech / Philips collaboration around the theme of live video, they picked up $30M.
For Twitch, being gamers who also ran a video streaming site was a huge unfair advantage, because they were in a position to recognize a trend as it just started. There was no reason, if you look at statistics or data, to believe that this was a combination worth a billion dollars - that moment had never happened before in the history of business, and will probably never happen again. There was a lot of reason, if you look at personal experience of them and their early customers, to believe it would be.
Similarly, Mark Zuckerburg was a college sophomore at an elite institution who had also built a machine-learning music player. He had a huge unfair advantage, because he realized what he could do with the personal data of a few thousand students. I was also a college student at the same time, at an elite college, and was (as a volunteer) involved with writing our own campus social network. It never occurred to me that it could be a business, let alone a $300B one, because at the time I thought that software companies were things that sold high-performance databases to Fortune 500 companies for real money.
What other unfair advantages do Hacker News readers have that they don't realize are advantages?
There was no reason not to believe the opposite either.
I think I have a problem with your use of the word 'unfair'. Unfair to me means 'cheating', 'foul play'.
Having first spent the required time to create a video service put them in the position to realize that there was another trend brewing and they capitalized on that.
It's a classic pivot into a niche that was unproven, it could have been worth absolutely nothing (and it looked for quite a while that it wasn't going to be worth anything, even long after they already bet the company on it). At least, that's what it looked like to me from the outside. I was more than happy to be rid of the gamers.
> It never occurred to me that it could be a business, let alone a $300B one, because at the time I thought that software companies were things that sold high-performance databases to Fortune 500 companies for real money.
Well, that's just sour grapes. And I'm pretty sure that Mark Zuckerberg is just as surprised as you are at the $300B. That you failed to capitalize on the same opportunity as someone else because they realized something that you did not has very little to do with Mark Zuckerberg being a college sophomore at an elite institution, and even less with a music player, it has everything to do with recognizing an opportunity when one comes along (and whether he acted fairly towards others in that same project or not is not the subject).
If you want to argue 'unfair advantage' you will have to shift your viewpoint to the third world.
Notice how I could have written that Justin had an unfair advantage over our team because he was in Silicon Valley and we were not. But I did not write that because I know that it wouldn't have made a shred of a difference. What matters is that he took the chance and we did not.
> What other unfair advantages do Hacker News readers have that they don't realize are advantages?
Hacker News Readers' advantages are: a great channel to communicate with like minded individuals, access to some of the smartest people that I know, a collective experience that dwarfs even that of the most seasoned individuals in the industry, access to capital, access to YC if you want it and you pass muster, in general a good or even excellent education, not to have to worry about what they're going to eat tomorrow (well, probably not everybody, but most of us anyway) and so on. In short, all the privileges that we as an industry (the IT industry) take for granted and that other people have to fight for.
But between us there is no 'unfair advantage', you're looking at a minute difference between two sets of individuals already from one of the most privileged groups on the planet.
I certainly don't harbor any sour grapes toward Zuckerburg - that is the nature of business, he was prepared & prescient enough to capitalize on his opportunity and I was not. And it's not like life has turned out badly for me in the meantime anyway. :-)
Unfair has a very negative connotation.
> And it's not like life has turned out badly for me in the meantime anyway. :-)
I think the word that succinctly communicates what you really mean in this thread is 'insight'.
Successful startups are about exploiting insights that seem obvious to you but not to others.
There is a degree of chance (lets stop using luck) about both start ups and sportsbetting. They depend on forces outside of one's control.
However, a lottery mathematically dictates that you will have a poor outcome of winning and all you can do is increase your probability by buting tickets. A startup has more control over how it operates.
A gambler can watch tapes and use past performance to find a perceived mismatch between the spread or gaming lines, and their appraisal.
Many gamblers are unsuccessful. However there is a reason that the same couple guys seem to make it to the end of the world series of poker every year.
Peter Theil discusses it in depth in You're not a lottery ticket. Startups are risky as hell and even smart people with good ideas fuck them up. However, smart people with good ideas only rarely win the lottery
amnended qoute from rounders.
Loss of salary for 1 year, 2 months
Does not include loss of 401k match or ESPP
Successful Kickstarter @ $25k
8 week contracting project @ 20hrs / week
Living expenses for 14 months (savings/stocks)
Post funding difference in salary from market rate
-$50,000 (year 1)
-$40,000 (year 2)
Total ≈ -$264,000
I think it is really impressive that you generated a significant income, which puts you arguably in a relatively high percentile of people who try to do startups.
Imagine a SaaS product that brings in just shy of a single Bay Area dev salary. Is that a success for a single founder who has put six years into building it? Of course not, right?
But what if said single founder now needs to put in roughly 100 hours per year to keep that business ticking along and delivering that salary? What if he can spend another 1000 hours per year building the next product, leaving a little over half the year to pursue his dream of competitive kite surfing?
Stick that into your curve, and I bet it'll trend a little more up and to the right.
Building a startup is hard. You will have to stand up to a lot of people who will tell you everything you are doing wrong. If you care a lot about social signals you probably shouldn't be an entrepreneur.
Edit: it's not so great for Hacker News though.
So... 100% of the founders.
Surely Twitch is an example of the 1%, not the 99%?
Not that I disagree with the end sentiment - I'm currently at a startup that was acquired as part of the 99%, but I don't think this is the most effective person to be saying this.
Certainly raising $42M and having an over-$100M valuation already put them in the top 1%, right?
No, it put them in the top .1%.
But even then, as a founder selling some of your own stock to a VC is not easy.
The reasoning behind this is twofold: first the VC wonders if the founder wants to set aside some money for themselves in case things go belly up, in other words, does the founder do this as an insurance premium? (Answer: yes, and why not, why should founders be always stuck with risk). Then the second: ok, so we'll make this guy 7 figures rich, what if he doesn't show up next Monday or absconds to Tahiti?
These and other (minor) fears are reasons why VCs are skeptical about deals where founders cash out (even partially) before they (the VCs) do.
Whether that is just or not is up for debate, I think VCs are well within their rights not to do deals, at the same time when you've been in the traces as long as Justin has (I've followed their story right from day 1 because we were in some ways a competitor) a bit of goodwill would be appreciated and I can see a couple of ways in which such a deal could be structured where most of the fears would be laid to rest. Still, it's an arrangement between consenting adults and if there is no consent then there is no deal.
That's tough but that's a trap that many founders are caught in, they have the stock but they don't have the liquidity and there is no market for their shares where they can get a chunk of cash 'just in case'. (pun intended).
I suspect this is more a case of "VCs colluding against founders" than "VCs being too dumb." When you have a legit $100 mil valuation, SOMEONE will buy those shares, unless you're blocked from selling.
I think the correct word here would be "richer". For VCs 5x return on an investment while desirable, it's not the ideal outcome.
Consider a VC invests in 100 companies during X years, $1 million each. Ballparking here but 80 of these will be a total failure. 19 of them will make 5x return. That is -$100 million spent and $95 million gained. So if the last one is "only" a 5x return the VC gets their money back (-inflation, time spent, etc). Thats why they are looking mostly for Ubers and AirBnbs imho
Would those 80 still have failed if the mindset was "get 5x returns" rather than the current "get 100x - 1000x returns"?
My gut says the demand for high-returns results in "total failure" in many cases due to insane burn-rates in quest for "hockey-stick growth"
Also, for the people that age out it seems like 3 more people join. Search viewership growth for games like League of Legends, Dota2, and CSGO and you will see that watching videogames is serious business.
If you include people watching in the client itself it is a bit closer but still Twitch would be double or more.
That's tiny. If you took a pitch for an eSports startup to a VC with that total market size they'd laugh you out of the office...
So while the 27 million viewers sounds impressive and shows up in the pitch deck of every eSports startup, it's not translating to significant revenue (yet).
That's part of what's depressing.
I'd rather there was a citizenry that read the Washington Post more than watching others play video games (or NFL or whatever) more. Maybe people would have a better handle of politics, and the economy and what's going on around them.
I think you're just getting old - and I don't mean it in an insulting way. You can be certain that the Greatest Generation weren't pleased with how the baby boomers were not "upholding certain cultural values" when they were listening to Rock n' Roll instead of "real music": and yet now Rock n' Roll has it's own cultural cachet. Culture is dynamic. I do empathize with you, but complaining that the younger generation is losing values is an old, old phenomenon.
Take this example from a quick Google search (admittedly it's a partisan source) http://www.thenation.com/article/eleven-years-how-washington...
Personally, as a DC native now living far away, I think a citizenry reading WaPo seems like a frightening bunch of conformists. Yes I am aware of what they did in the 70s. Different paper now.
Especially since entertaining gets all the more Huxley-an and Kardashian standards all the time.
I don't ascribe to the "culture is always the same constant thing quality-wise, nothing ever changes but fashions" viewpoint.
From all I've read from others and experienced personally, I see that even if that well-informed culture in the past only concerned/involved like 5% of the people, the equivalent 5% is worse off today.
At least in my country, along with the usual entertainment stuff, 20 or 30 years ago we had several excellent newspapers with big circulations. Editorial standards now are at an all time low -- and even worse for the internet outlets that replaced them.
Same with TV -- the quality of TV product has shrank considerably, from high brow movies and talk shows to the equivalent of Oprah or reality TV.
TV news for example, started with a couple of presenters giving an overview of current events in a somber tone and well written copy, and it has since the late nineties turned into the equivalent of a Geraldo show, with "dramatic" music, overdone titles, and the hosts having guests in PIP windows arguing at each other.
So, I consider it like I would consider a lack of caring of the environment, or for helping people in the streets, or inversely, an increase in racism etc: as the fault of the people not caring -- not of others that failed to convince them to care.
The #1 thing for a citizen is personal responsibility.
A better comparison would be the World Cup.
While both companies operate in a thin margin environment, content creation is not easily scalable but content distribution is.
Also, shrinking market vs growing market.
Besides, value to society and value to investors don't always go hand in hand.
Count how many TV News programs make reference to what they found on social media?
[EDIT] In case anyone doesn't get the reference:
 See e.g. https://s3.amazonaws.com/startupcompass-public/StartupGenome...
I would think that this guy's fame would have made this market opportunity super-obvious.
With his own personalized collection of Minecraft toys and all:
Relaively few YouTube gaming celebrities stream due to quality control. Twitch celebrity streamers use YouTube primariy to host stream highlights as Twitch's VODs are not convenient.
Notably, YouTube Gaming, which was YouTube's Twitch competitor, failed miserably since there was no clear advantage to switching from Twitch (among UI/Content ID/monetization issues)
I know many YouTube gaming celebrities who have become successful enough for merchandizing, but not any Twitch celebrities. They're separate markets.
I used Stampy Cat to make the market point, because there were hints that the "alright, let's play this game" spectator video was going to be a big thing, even before Twitch was Twitch.
This guy has been operating since Minecraft was in it's infancy, and he had a large following before Twitch was a big thing.
(1) Is this a good thing? IE should founders, employees, VCs or other shareholders be able to cash in shares? (2) Is this fixable in some way?
Raising a round is a very very hard thing to do. As an entrepreneur, you look around and all you see are the 1% in the media. On the other hand, the fundraise feels like you go door to door getting your idea shot down by everyone you talk to. The passion and tenacity to fight through this negativity is what Justin is trying to elicit.
This is the key line:
> I tried to sell some of my shares in a secondary transaction at less than a fifth of that price – and I was turned down by every VC I asked.
So, he eventually actually made more on those shares, about 80% more and lucked out. But there is no way of knowing what would have happened in an alternatively universe where some VC would have bought a chunk of stock from Justin. Maybe then this deal would have never happened. You don't get to play twice, but it's nice that it all worked out so well for him.
Correction: at least 5x more.
Also: obviously I don't know the full context about this particular deal, but it always seems a little sleazy to me when still-involved founders sell in a secondary without making that deal available to the rest of the owners.
> it always seems a little sleazy to me when still-involved founders sell in a secondary without making that deal available to the rest of the owners.
Well, that depends. If the founders have laid everything on the line for a really long time then I can imagine taking some off the table so you don't have to go back to work in your dads garage if things go badly wrong. If someone is past their vesting period and they own the stock free and clear they should be able to sell it if there is a market. Other stockholders will have these abilities as well (assuming there are no limitations or shareholder agreements to the contrary).
Usually the rest of the stockholders would have an option to purchase the stock at the price agreed between the founder and the outside party anyway, and if there are drag-along clauses then the buyer might find himself forced to buy from many parties.
It all depends on what the papers say and what kinds of shares there are.
WTF? The Twitch case is nothing like what 99% of entrepreneurs face.
$42M? Try having $42 in the bank and then saying "haters gonna hate".
Is the summary of that article something like "this one VC didn't buy shares from me but then I got rich so fuck the haters 99% of you are going to be rich too" or something?
The article is like a word salad.
There's a lot of luck involved in making a startup, and startups can fail for any number of reasons that no data can predict. The notion that if you do your best, you will succeed, is dangerous to naive entrepreneurs.
> "trust your numbers and growth to give yourself confidence in the face of rejection"
I don't imagine the people that you're worried about this being dangerous for can always find comfort in their numbers and growth.
This isn't what he said in the article though. It's more about knowing your audience and the VCs in this case not knowing.
That is dangerous to any naive person in the world in any area of work. Doing your best, means your boss will look at you like a threat that you might take their job, or some political cartel in a big company will treat you like a pawn who does all their work, while their yes men reap benefits.
Start ups are only a area of work where the heart burn is amplified because of a lot of work is done in a very short period of time.
I sort of understand the general message of self-confidence, but calling it the 99% renders it highly confusing.
I paraphrase, but Poe's Law is in full effect here.
"If the fundamentals of your business are good, believe in the data even when investors don't recognize its value. Eventually, they will."
About Twitch.tv - “Watching people play video games is a niche” is now “I’m in charge of our consumer, marketplace and esports investing.”
Fuck them. Build your business.
Makes sense :)
I feel really sorry for you bro. If you want some consolation you're free to PM me and we can totally hang out and you can buy me a house.
I cannot agree more with Justin and we have had several investment cases like that.