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The 99% (of startups) (justinkan.com)
532 points by thatha7777 on Dec 2, 2015 | hide | past | web | favorite | 167 comments



This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's. It also shows the the near-impossibility of cashing in private company shares, at least through VC's. In addition to this story, the Sony hack revealed that Evan Spiegel of Snapchat wanted to cash in about $40 million worth of shares just after he spurned Facebook's $3 billion offer. He was also roundly rejected. Had someone bought those shares, they would have been worth around $200 million today.

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.


There are lots of businesses where it's really easy for founders to cash out - profitable businesses! I'm not even trying to be one of those HN commenters that bemoans the cashflow negative startup ecosystem (lots of ways to build a business), there are tons of profitable businesses whose founders cash out large amounts of stock regularly.

The category of VC that wants founder secondary and the category of VC that likes loss leading consumer facing businesses are not well aligned.


The way you phrase this reminds me of what I studied happening in the hedge fund world, in that some of the 'top performer' funds only out-performed the market due to insider trading. Galleon (Raj - convicted), SAC (sanctioned), and probably a handful more that got spooked out of the avenue of enrichment. It almost seems - almost - like there may be a similar insular community whereby those who feel like piling in will only do so when it's a consensus movement play.

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.


There are people who willfully, knowingly invest in ponzi schemes, on the premise that they will try to get out before operator flees with the money because up until that point, it has outstanding returns.


There's an old saying that "you can't fool an honest man". Where did all the Albanians who poured their savings into Ponzi schemes think the crazy returns were coming from? Drugs. Where have a 419 scammer's supposed riches come from? Usually embezzled from Nigerian public funds.


You can't con a honest man.

You can certainly fool one.


It's fascinating to me that many startups put their crown jewels on github, a company with an inexplicably high valuation due to investments from some of the most successful VC companies. Don't they worry about exactly the kind of insider trading you're talking about, or worse?

Same goes for slack.


it is fascinating that people think most of the code from startups is crown jewels. If you look closely 99% of code is not hard to reproduce it is just time consuming to write but I doubt you will find some breakthrough ideas. Sure you might find some cool/impressive thing here and there but especially at early stages nothing there except number of hours put in. I know people tend to glorify things they write but mostly it is not that stellar achievement what they did.


If I was a VC assessing a firm, I would love to get a look at their git repository, and not just for due diligence. I would know where their demos are inadequate, which would be very useful for bargaining.


If you're a VC serious enough to start bargaining, you're going to have done a code audit already (whether or not it's on github) to validate claims.

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.


"Crown jewels"? You mean a git repo? You know it's a matter of minutes to migrate between git repo hosting, right? :)


His point is that you're giving the VCs indirect access to your sourcecode, not that github would go belly up.


> This gives an interesting glimpse into the prognostication abilities of supposedly brilliant VC's.

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.


Texas sharpshooter fallacy[0]. The specific problem with your argument is that you didn't set forth a hypothesis that would predict which VCs would be successful before they'd all started investing their money.

[0] https://en.wikipedia.org/wiki/Texas_sharpshooter_fallacy


Don't think that applies, the rules or criteria for economic succes are set.

Perhaps the comparison should be against the index.


The point is that there's a relatively large number of VCs, a relatively wide distribution of returns and the pool of established VCs is skewed by those that don't enjoy early successes tending to be replaced with new VCs, irrespective of whether that was down to them being unluckier or less skilled than those which remain.

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.


Sure, all true, thanks.


Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability. Top firms are offered the best deals (every startup wants to be funded by them), which means that they might be able to achieve better returns without being "better" than other VC firms in terms of, say, investing acumen or operational advice.

It could be that 0% of top VC returns are explained by this; I'm curious, though.


> Something I've often wondered about his how much of the top 10 VC performance advantage is due to deal availability.

My guess is, most of it.


> 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.

Does 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.


This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation.


That would need to hold for substantially all of the "top" outperforming our expectation of a naive person with the same deal-flow.


> This analysis breaks down if the top ten outperform the market after you've started watching them. If that's the case (which for top ten VCs it is), the math suggests it isn't a "million quarters" situation.

Actually, it doesn't. The top 10 VCs aren't static and unchanging.


Well, there's also a self-fulfilling aspect when it comes to top ten VCs doing consistently well. Entrepreneurs and startups that are somewhat successful / proven can pick any VCs they want. And they pick the well respected (ie, historically successful) VCs.


Especially if top 10 is defined as "doing well" :)


A November 2015 Cambridge Associates study: "The widely held belief that 90% of venture industry performance is generated by just the top ten firms is a catchy but unsupported claim" http://www.cambridgeassociates.com/our-insights/research/ven...


Is there enough public visibility into the top ten's deals to know that this is true?


Of course "better than random" is only worth something if the odds are decent, for example if random chance tends to yield $0 (no loss no gain).


Take 1000 people, have each predict a coin flip 10 times. The top 10 players will have predicted way better than random chance would have you believe. Why several of them are even 10 for 10, they must have special prediction powers! ;)

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 modeled this one day in Excel, using random numbers. In my case, the game was Russian Roulette and the group played it once a year for 20 years. I was very surprised that no matter how many times I refreshed the random results, a large percentage of 'players' were still playing after 20 rounds.

I read this example in a book or article, but I can't remember what that was called.


I was curious about this so did some super quick modelling.

With 1,000,000 people predicting 100 coinflips each, the top ten had an accuracy of:

75% (1)

74% (1)

73% (1)

72% (7)


British illusionist Derren Brown made a documentary about this, called "The System", where he wrote letters to people predicting the outcome of horse races using his secret system, and suggesting they place a bet.

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.

http://topdocumentaryfilms.com/derren-brown-the-system/


Some people can be incredibly lucky despite a lack of skill. Statistically, it's unlikely, but given a large enough sample size, someone will have extraordinary success purely by chance.

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.


Enough time and volume should eventually show whose truly good (statistically).


Flip 1000 pennies and calculate the results enough times and you'll get a gausian curve. Some results will consistantly flip heads the majority of the time.

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.


Explain Berkshire Hathaway for me then, please.


Berkshire doesn't just buy stock. It buys a controlling interest and influences the way the company is run.


VC investors tend to influence the company too.


While true, the difference between the decisions the board of a company makes and the 'investors' is pretty significant. VC investors are not there to act as a board of directors. Where as many private equity/takeovers deals usually end up replacing many people on the board and executives.


They mostly make money with the private equity business by buying businesses with high cash flow and extracting more cash from them.


Then why hasn't Coca Cola been sucked dry?

That does not describe Berkshire Hathaway at all.


Extremely unpopular fact: Berkshire has fundamentally the same business model as Bain Capital. They just do it better.


I disagree, but let's say you are right. Then that model does outperform the market, no?


It does, but how much of that comes down to lobbying. I wonder who was pressuring Obama to not approve Keystone, and who also happens to own a ton of railways that transport oil?


It's not that hard to get some liquidity on the private market, as long as you're not selling quantities so large they can only be bought by a fund. Just work with a specialized broker who does this for a living, and they'll find the buyer for you. If your company's doing well enough, these brokers will even come looking for you.


> If your company's doing well enough

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.


I wonder why Zuckerberg didn't buy the $40M stake personally. I'm guessing he was turned down.


Why would he? He wanted the whole company and was spurned. What incentive would there be to then reward the founder with 2 commas of personal liquidity?

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.


Pretty sure the fb board wouldn't have a problem with Zuck getting any in into one of their top competitors. Zuck bleeds fb and a minority stake worth a fraction of his net worth isn't going to negatively impact his judgement.

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.


> It's pretty common for companies to get minority stakes in competitors to get an in.

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.


Heineken recently bought a 50% stake in Lagunitas brewing company as one example: https://lagunitas.com/heineken-and-lagunitas-brewing-company...


Yes. Porsche made cars but also purchased a stake in Volkswagen. http://priceonomics.com/porsche-the-hedge-fund-that-also-mad...


Just because Porsche and VW both makes car don't make them competitor. One is a luxury car maker and another is mass car producer. Adjacent market deals are common, direct competition are uncommon.


Volkswagen was their supplier for some components, no? Buying a stake in your supplier/customer is a lot more common and non-antitrusty.


Dell. Michael Dell owned 15% of the stake. He partnered with a hedge fund to take it private(buy it back from all the many shareholders.)

Also, Jos A Bank's takeover by Men's Warehouse, facilitated by minority owner Eminance Capital.


and they would have an eaasier time getting rid of 200 million worth of private shares right?


No, but it is reasonably likely that Snapchat will have a liquidity event at some point in the next couple of years.


Would love to see a series of good curves:

(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.


I think that would make for very depressing reading. It would be comparable to making a documentary about everybody who ever played the lottery. For the most part you'll see people that lost. Year after year after year. And then there would be the lottery winners. A couple of them.

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.


Thank you for being (seemingly) the only person on HN who understands that startups are a lottery. A very, very expensive lottery.


But they aren't a lottery. Startups (and business in general) is about unfair advantages - knowing information that other people don't, and acting on that knowledge.

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. [1]

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.

[1] https://clip.mn/video/yt-qAws7eXItMk


> Twitch succeeded because, as justin.tv, they were in a position to notice rising demand for gaming livestreams.

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.


That's what I'm trying (and apparently failing) to get at:

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?


> 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

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 think that you're taking the emotional tone of my message differently than I intended it because I use the word "unfair" differently from how many people do. To me, it just means "Something not shared by many people; a trait that may gain you certain privileges that not everyone possesses." It's a valueless judgment, because I've already come to terms with business (and the world) being unfair. I could use the word "unique" instead, but chose "unfair" both because unfair connotes privileges (which we are certainly talking about here) and because Peter Thiel has talked in the same terms about what makes business go round.

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. :-)


Fair enough :) It would make communication easier if you put such creative uses of words up front. I'm not familiar with Peter Thiels use of the word 'unfair', but the doesn't get to creatively re-define the words we use either.

Unfair has a very negative connotation.

> And it's not like life has turned out badly for me in the meantime anyway. :-)

Excellent :)


Peter Thiel used the word 'unfair' as you would expect, in the context of saying that monopolies are successful for exactly the same reasons that they are unfair. And that, as a founder, people should be looking to build monopolies (which are unfair by definition).


"Unfair Advantage" compares to "Creative Destruction" that way. Neither mean what an un uninformed reading of the word pairings would suggest.


> Startups (and business in general) is about unfair advantages - knowing information that other people don't, and acting on that knowledge.

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.


That is the wrong wy to think about it. If you want to take an analogy, and I still dislike it but if pushed, I would call it sportsbetting.

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[0].

Peter Theil discusses it in depth in You're not a lottery ticket[1]. 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[2]

[0]amnended qoute from rounders.

https://m.youtube.com/watch?v=g7VMjutSNHk

[2]http://m.nydailynews.com/news/crime/mit-students-scammed-mas...


I think everybody knows it, but "you've got to be in it to win it".


Dug up a post of mine from 2 years ago [1]. I bootstrapped for 14 months without salary and then took a pay cut for 2 years. Here are my numbers. I blogged about this as well [2].

  Loss of salary for 1 year, 2 months
  Does not include loss of 401k match or ESPP
  -$140,000

  Successful Kickstarter @ $25k
  +$20,000

  8 week contracting project @ 20hrs / week
  +$16,000

  Living expenses for 14 months (savings/stocks)
  -$70,000

  Post funding difference in salary from market rate
  -$50,000 (year 1)
  -$40,000 (year 2)

  Total ≈ -$264,000
[1] https://news.ycombinator.com/item?id=7570428

[2] http://jaisenmathai.com/openphoto-trovebox/


Thank you jmathai for digging up your numbers and posting them again. Really appreciate it, echoing the previous poster, I think living expenses really shouldn't be part of equation as you would incur them anyways if you had a FT job.

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.


Thanks for the numbers. I imagine you got equity of the company in the end, so in terms of your personal asset accounting, it should be factored in (not that getting a valuation on equity is easy, if it hasn't been traded).


Trovebox shut down in January 2015 so that equity is worth nothing.


We sold the technology to Western Digital and went along for an acquihire. In the end it approaches break even but even that's nearly negligible.


Pity! I had my fingers crossed that you would have some kind of neat exit, you certainly deserved it with all the hard work put in. Better luck next round!


Your living expenses don't belong in those calculations. In both cases that would be money spent. In case of a startup if you have less expenses they would even offset the total.


What about taxes?


You'll want to divide again by hours worked per year, since that's where the true payoff comes from running your own business.

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.


Thank you jasonkester, it is indeed very complicated because to be nitpicky, you have to consider the growth or decay of the said established SaaS business over the years, the probability of the next SaaS business taking off; which I'd go out on a limb and say is highly variable but assume the median case to be: steady of loss of income from established business (e.g., BingoCard Creator) and very high risk/reward of next business in pipeline taking off.


Why the hell is this so negative ? He is very clear "This is for all the founders who know they have built something that people want, but the rest of the world hasn’t recognized it yet." It must be tough as a founder to prove yourself and others that there is an certain value to his/her business. Isn't a good exit is what an investor's or founder's option ?


Or to paraphrase Horowitz.

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.


Then again, 99% of the people telling you what you're building will never work are right.


Sure there are no certainties. But you won't know if you don't try.


Fortunately, for such founders, Hacker News negativity is a rounding error.

Edit: it's not so great for Hacker News though.


> "This is for all the founders who know they have built something that people want, but the rest of the world hasn’t recognized it yet."

So... 100% of the founders.


“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. Thank You Justin, just what I needed today !


I kind of don't understand this post.

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.


Twitch is surely an example of the 1% now, but he's saying that you may not be at that point yet and still have a great startup, regardless of what you are valued at, at this moment.


Right. He's saying that Twitch is a 1%-er now, but even 9 months before their deal they were in the 99%, aka VCs are clueless sometimes.


What's interesting is that they had already raised $42M at that point (according to comments here).

Certainly raising $42M and having an over-$100M valuation already put them in the top 1%, right?


> 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%.

Easily.

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).


Exactly, the 99% would be someone like Appointment Reminder by Patio, or HitTail, or some bootstrapper that grinded it out for many years without funding, external validation, or connections.


No, it is simply very hard to make the call.


Sometimes it's hard to make the call. Sometimes VCs are just stupid.


For those that don't know, Justin's new app The Drop is pretty cool. It's like reddit for EDM. https://thedrop.club


This is cool. It's very similar to The Hype Machine, my favorite way to find new music.

http://hypem.com/


wow, layout looks like a total rip off of Product Hunt


Is that seriously the only site with this layout you've seen?


That's the most clear use of 'fuck you money' that I've ever seen.


Nice. Sadly it's super rare to see anyone who's made it deviate from the script and share authentically like this.

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.


"...but there are hundreds if not thousands more startups that will make their founders and investors rich."

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


> Ballparking here but 80 of these will be a total failure

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"


That is a fair question, and a "what if" type so its hard to answer. if you assume an ideal world with sane CEOs than it shouldn't matter what the investors expect. The startup should burn cash at an optimal rate to achieve the highest profit. Of course don't live in an optimal world...


The interesting question to me is if Twitch would have done as well if he hadn't gotten rejected 9 months earlier. Unfortunately we can't spin up another universe, alter that one variable and run a test.


It's depressing that Amazon paid four times as much for this business as Bezos did for the Washington Post.


27 million people watched the League of Legends world championship[1] which is on par (or better) than MLB & NBA championships. It's pretty clear eSports is going to be huge. Having the biggest streaming site/brand will be valuable and doesn't seem crazy in that perspective.

[1] http://espn.go.com/espn/story/_/page/instantawesome-leagueof...


That's a high single-event number. Do the numbers sustain across the year? MLB and NBA have over 100 events per year (considering all the days games as one daily "event")


While some people stay with a game/genre/gaming forever I notice a lot of people "age out" and can't even invest the time to keep up with watching esports (much less playing the games they're watching). I wonder if, assuming my observation is the norm, that will impact numbers as society has less children.


People age out but those that age out don't have the attitude of "old people", which in this case is "why would people watch this" and "this is a waste of time". (not trying to generalize older people but i think you guys know what type of people I'm talking about) Slowly esports and will become more and more mainstream (probably not completely mainstream but I can't predict the future) and more and more people will watch it.

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.


Mm, League has events maybe 20 or so weeks of the year (matches mainly on weekends), for probably 8 of those we see very high numbers. But Twitch also hosts other stuff - SC2, Hearthstone, and CS:GO also draw large crowds. Dota 2 also, but Valve does have their own streaming platform for that.


The numbers on valves own streaming platform for dota are usually 10% or less of the numbers on twitch for major events.

If you include people watching in the client itself it is a bit closer but still Twitch would be double or more.


Clearly this is a long game play.


It's a $250M business globally according to a research firm that focuses on the eSports industry:

http://www.newzoo.com/insights/esports-in-2015-engagement-gr...

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).


>27 million people watched the League of Legends world championship[1] which is on par (or better) than MLB & NBA championships.

That's part of what's depressing.


Why would that be depressing?


Well, for people upholding certain cultural values like me, which are not exactly too far-fetched, it's pretty obvious why an era where people watch live gaming in droves is depressing when contrasted with the decline of journalism.

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.


> Well, for people upholding certain cultural values like me, which are not exactly too far-fetched, it's pretty obvious why an era where people watch live gaming in droves is depressing when contrasted with the decline of journalism

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"[1]: 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.

1. http://rock103.iheart.com/pages/twisted/banned/


How much do you read the Washington Post? Personally, I wouldn't put it on a pedestal.

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.


The two aren't mutually exclusive. Humans have pursued leisure for probably as long as there have been humans.


Sure, but that's in theory. In practice we have tons of uninformed people -- which one can see not just in personal encounters but in all kinds of polls and research --, and a heavy increase in shallow entertainment.


Maybe somebody will come up with an esport that incorporates current events that is also entertaining enough for a lot of people to watch.


If people only watch/read stuff because it's "entertaining", that's already a loss to culture and democracy.

Especially since entertaining gets all the more Huxley-an and Kardashian standards all the time.


That's implying that it hasn't always been like that. The masses are usually looking for things to enjoy themselves with, it's not like a century ago people were more well-informed about what was happened.


>That's implying that it hasn't always been like that.

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.


If you see inefficiency in the awareness of citizens. Do something about it. Disrupt. Clearly the Washington Post is not catching enough consumers.


I don't hold the idea that it's the news sources fault. Even with all the crap on mainstream media, there are more than enough excellent sources (including free) and a lower than ever barrier to access them.

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.


It's better to have ways that work with human dopaminergic feedback system instead of hoping for good-will and perseverence of the few gems of society. We are flawed as biological creatures. Our motivations are few and far. Good tech should warrant use onto itself. Good governmental systems should warrant good use onto its citizens. And good news/media/information systems should warrant good knowledge and information and affinity for that - upon its users.


American tournaments vs. world tournaments.

A better comparison would be the World Cup.


Content creation vs content distribution.

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.


Twitch also fits in great with Amazon's overall strategy of distribution across all verticals - from retail and Prime Movies/Music, to cloud services and esports.


I think its validation that the old ways of media are coming to an end.

Count how many TV News programs make reference to what they found on social media?


I would guess that the cost of running Twitch is much less than 1/4 of the cost of running Washington Post. You have a few servers and a handful of programmers vs. hundreds of reporters.


You have Kyle and Brody, just send them a pizza and they get the servers back up! Radical, brahhh, pizza ninja turtle programming! Make sure to send brody extra pepperoni for his sacrifices.

[EDIT] In case anyone doesn't get the reference: http://justinkan.com/three-stories


90-99% of startups fail[1], which should be mentioned in a post with that title.

[1] See e.g. https://s3.amazonaws.com/startupcompass-public/StartupGenome...


I'm unaware of the timeline but I'm curious was he trying to sell shares in JTV or did twitch eventually spin off to a separate corporate entity from JTV. It makes a huge difference because JTV was a huge liability nightmare.


I love Justin Kan's writing. If you read this Justin keep writing more man!


These investors aren't paying enough attention to their children / their colleague's children.

I would think that this guy's fame would have made this market opportunity super-obvious.

https://en.wikipedia.org/wiki/Joseph_Garrett

With his own personalized collection of Minecraft toys and all:

http://amzn.to/1O4VQNi


There's a big difference between YouTube fame and Twitch fame. Counterintuitively, there's actually little overlap.

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 don't disagree.

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.


"No one can make you feel inferior without your consent." --Roosevelt


Questions for YC (I think):

(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?


At the time he attempted to sell his shares, Twitch had raised $42 million, and had been valued at around $100 million several months earlier [1]. He is complaining about the gall of VCs not to buy his shares at a price that would imply a valuation of less than $194 million (and presumably not that far below). I do not believe that this is a good attitude for entrepreneurs to internalize.

[1] https://www.pehub.com/2014/08/amazon-pays-970-mln-for-twitch...


His sentiment is worth much more than the raw numbers.

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.


No, that's not why no deal happened. I suspect it was because he was not raising money but because he was selling some of his own shares. In other words: he was trying to take some money of the table. And those are very hard deals to close.

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.


about 80% more

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.


You're absolutely right, what was I thinking. Need to sleep more and more regularly.

> 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.


Playing in the NBA a very, very hard thing to do. As a player, you look around and all you see are highly paid athletes in the media. On the other hand, trying to secure a lucrative contract extension can lead to rejection. The passion and tenacity to fight through this negativity in order to feed your family is what Latrell Sprewell is trying to elicit. [1]

[1] http://www.si.com/vault/2004/11/15/8191994/getting-by-on-146...


> Twitch had raised $42 million, and had been valued at around $100 million several months earlier

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".


What the hell is he talking about?

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.


Justin is saying that VCs understand what's hot now, but are sometimes bad a predicting future value. So to founders, if you're creating value, keep going even if VCs don't see the light yet. They'll come around.


The haters-gonna-hate philosophy in Silicon Valley is starting to become a problem.

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.


The parent article contains this line:

> "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.


>The notion that if you do your best, you will succeed, is dangerous to naive entrepreneurs.

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.


>>The notion that if you do your best, you will succeed, is dangerous to naive entrepreneurs.

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.


That may be. But when he invokes the 99% he has veered into incomprehensibility. His anecdote has literally nothing to do with the daily issues faced by 99% of startups, and more to the point, seems oblivious to the fact that nearly all of them will fail and return no money or equity sale to anyone, hater-fucking notwithstanding.

I sort of understand the general message of self-confidence, but calling it the 99% renders it highly confusing.


yeah i think that's what he is saying. I also think if you get to sell your company for almost a billion dollars, you get to say fuck you to the haters in any way you want to.


"I was successful even though there was a long time that I thought I wouldn't be all that successful, and I've gotten to where I am because I believed in myself."

I paraphrase, but Poe's Law is in full effect here.


I disagree with your interpretation. I think Justin is saying,

"If the fundamentals of your business are good, believe in the data even when investors don't recognize its value. Eventually, they will."


But what about respecting the Principle of Charity [0]? Once we do, then we shouldn't we also apply the Precautionary Principle [1]? We find that, if we do, then what the OP prescribes (lead, not silver, bullets) is hardly worth questioning, since otherwise we are claiming there are hidden risks of hard work (which, to be fair, do exist; burnout et. al are not pleasant to deal with in reality). I think that we can agree this (that we should not strive to work hard, especially after rejection) is harder to accept.

[0] https://en.wikipedia.org/wiki/Principle_of_charity

[1] https://en.wikipedia.org/wiki/Precautionary_principle


Tl Dr:

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 tried to sell some of my startup shares for below what the market turned out to be willing to pay for them, but people said no because it wasn't trendy and it sort of hurt my feelings, but then I got rich so haha!"

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 really don't think that was the message he was trying to convey. If anything, he was trying to inspire other startups/founders that feel unappreciated/underestimated.


"There is a tremendous amount of excitement about the top 1% of startups, but there are hundreds if not thousands more startups that will make their founders and investors rich."

I cannot agree more with Justin and we have had several investment cases like that.


What an odd comment. Reads like a spam for "zillionize".


(Parent has edited the comment now)




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