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Exploiting Silicon Valley For Profit (and Maybe Fun) (diegobasch.com)
283 points by dbuthay on June 21, 2012 | hide | past | web | favorite | 117 comments

Disturbingly accurate.

• Make a sufficiently shiny, yet imminently disposable product.

• Hoard employees (each one bumps your valuation by ~$1.5 million), be loud, get acquired.

• Kill product. (You never cared about it anyway -- it was just a vehicle for ego and attention. Now that you've got your $5 million, you don't need the validation of all those silly pawns/customers anymore.)

Heard this recently, with a little more background history, and little less humor: http://www.youtube.com/watch?list=LL1tJgy-O6EgwisFV559z43w&#...

What worries me, more than the accuracy of the story or not, is the overwhelming level of agreement from commentators. There's a pervasive sense of cynicism blanketing the tech start up world, but for some reason we're all still in the game.

There's a certain amount of hypocrisy you have to accept. We do this to ourselves. No one on HN would think worse of themselves for achieving a $5M exit, yet we are happy to vilify those who do.

Where are the founders of the next GE? The next IBM? Those who seek to solve the fundamental problems society faces? I'm not asking about space ships and world hunger. I'm just talking about solving real, concrete, long term business problems. The ultimate filter on this is simple: If your product were to disappear, would your customers' quality of life significantly decrease?

To be realistic, who wouldn't want to be holding 30% of a $10M or $20M buyout? There will always be the allure of quick money, and tech isn't immune to the sentiment.

It seems to be similar to the Zed Shaw talk-within-a-talk [1]. Instead of working for BigCo for a paycheck and going home to work on your own things, you use a lesser idea and work for a VC via their investments while developing your master idea. The difference is the level of risk and the size of the payout.

[1]: http://vimeo.com/2723800

The other part that isn't mentioned here is this is a commentary on the most visible portion of the tech industry, namely web/app based social startups. I can't help thinking of Sturgeon's Law. In a way, that makes me cautiously optimistic. You have a bunch of people tackling hard problems in computing as well as society. When Facebook changes it's privacy settings, or Path collecting our address books, we all freak out. It forces us to confront things we as a society never had to think about before. Fifteen years ago, who was thinking this seriously about mass privacy concerns that didn't involve the government?

I also look around and think about what cool things happened in the last decade. I can look up anything from a black monolith sitting in my pocket. I can connect with people I haven't seen physically in years. I can read about events as they happen in real time. I can buy just about anything without ever leaving my house, and it will arrive a couple of days later. I can learn about any subject from very respectable institutions for free.

In a few years, we will have a (more or less) unified communication system for health records, cheap 3D printers and fabricators, a mass market for self driving cars, and privately funded space travel. Right now people are seriously considering space mining of all things.

All of these things were born alongside purely self-interested companies that have since failed or were acquired. If it takes many short term companies to get a few gems, then let the VCs, GooBooks, and hustlers knock themselves out. I highly doubt we can optimize for more success, so I don't see a point in fighting it. Maybe it's that very culture that allows for such gems to be formed in the first place. Even if you are involved with such a company, the talent and knowledge you come away with is invaluable and will follow you wherever you go.

I would say you should try to make your ideas a reality. You should try to make money, build companies, and commit yourself. You just might be involved with something great.

</reality distortion field>

"Where are the founders of the next GE? The next IBM?"

Not doing startups.

If not now, eventually they must be or must have been "doing startups" because all businesses begin as startups. It's in the name, a startup is a company that is just getting started. Some eventually grow up into the titans of industry that we all know.

The parent is wondering why don't we see more entrepreneurs founding companies that look like they could become the next titans of industry. It seems to me that their companies either don't exist, or are currently invisible because they haven't begun gobbling up market share.

If new startups agreed that they wouldn't leave their users out to dry if they got acquired would you be more likely to trust them and use their service?

Getting a future promise from a startup CEO is as trustworthy as a politician's promise during election season.

The only sane approach is open data. Leave everything available for export so some other feature company can pick up where you left off.

You could venture into an insane realm where startups enter into a Startup Insurance™ league. When a company gets acquihired, instead of shutting down the product, a separate foundation runs the product (or figures out a way to open all the data for export).

No, because how would they enforce that? If your company is acquired, all that goes out the window anyway.

Keeping the product alive could be one of the terms of the acquisition, but it seems unlikely - it could lower the offer, and it's unlikely startup founders would throw away money on a matter of principle unless the community promise was somehow legally binding.

In a sense the promise is a "non-credible threat" in game-theoretic terms. It would attract users if they carried it out, but because acquisition happens after the user-attraction stage they don't have an incentive to carry it out. This means they won't rationally carry it out, which means they don't attract rational users. This situation can be avoided if they "tie their own hands".


If startups want to be acquired, they'd never make such a policy anyway, because that makes them less attractive to the acquirer (who, after all, may only acquire them to prevent competition).

So I liked this, like everything else Diego writes, but this graf doesn't ring true to me:

Joe and Wayne work on building something they know GooBook could acquire without looking stupid. Something they might be able to do in-house, except their most talented engineers are desperately working on ways to extract more money out of ads, or to reduce the costs of their gargantuan infrastructure. Some are stationed in Antarctica building a self-cooling datacenter; others are diverted from creative projects into the new 99.9999999999% uptime initiative: one second of downtime costs a million dollars. Forget that stupid 18% free-time web app project, and come help make some mon-ay. The quarterly report must look good. Shareholders demand it!

Working on self-cooling data centers sounds awesome to me, & also penguins. But more importantly: the 99.9999999999% uptime initiative that saves a million dollars for every second rescued sounds awesome to me. Developers are rarely so privileged as to work on problems that are simultaneously hard, well capitalized, and easily quantifiable.

"Mon-nay"? This paragraph reminds me painfully of how mouthy I was when I was 24 and had just had the company where I was an early employee be acquired by a BigCo.

Of course it's awesome to work on those problems. The point I was trying to make is that in this case the company has to choose between innovating for the long term, and solving urgent problems that mean lots of $ in the short term. Internal venture projects tend to be put on the back burner when your best engineers could save 50M by optimizing the hell out of your backend.

I'm continually reminded of Neal Stephensons remark "I saw the best minds of my generation... writing spam filters." He talks a lot lately about how we've stopped trying to solve the really hard problems and instead are continually trying to sell digital "sugar water."

*Source: https://plus.google.com/116416314233992548280/posts/NxCMjiQX...)

Truly defeating spam in all its guises (SEO, commercials, daily offers, junk mail) is a pretty difficult problem. How do you recognize cleverly concealed data? Spammers constantly adapt to spam filters and new/pristine communications channels which catch on precisely because they are relatively spam free. Of course, spam filters also evolve, this kind of runaway adversarial co-evolution is what leads to systems which can effectively lie/manipulate perception, or detect such.

By "difficult" he doesn't mean "technically non-trivial."

He means world hunger, building spaceships, developing new sources of clean energy, etc.

I'd rather have spaceships AND spam than no spaceships and no spam.

From Google: dif·fi·cult/ˈdifiˌkəlt/ Adjective: 1. Needing much effort or skill to accomplish, deal with, or understand. 2. Characterized by or causing hardships or problems.

I don't see lack of spaceships causing hardship, so that's really more of a definition #1 type of thing. Society built spaceships in the 60's, contrast that against the effectiveness of a spam filtering system built with hardware, software, algorithms and statistical inference techniques available in the 1960's.

While I appreciate and admire the work put into into accomplishing space fight, the existence of manned spaceships really doesn't contribute much to my existence, whereas spam sucks away a bit of my life, every day.

OK how about I rephrase: I meant "OMG-big-deal-game-changing problems." Difficult is just a proxy for that.

To Stephensons point, which he makes in the video in the link, he really means dreaming up and solving big problems. The example he gave was building the worlds tallest building. I'm paraphrasing him here: <paraphrase> Typically accomplishing the goal of building the worlds tallest building is measured only in contrast to the current record holder. So when people aim to set this record, it's only incrementally bigger. If you actually do the research you'll find that it's possible to build a building 20x taller than the tallest existing building. Why aren't we thinking on that scale?</paraphrase>

How would you get in and out of the upper (or even middle) floors of a 3000 story building? Atmospherics would be a serious concern at 10 miles up. Sounds like the kind of project the North Koreans would start and then abandon when they ran out of money.

So I guess now all marketing is spam.

Pretty much.

Allow me to quote myself:

In the '60s, the best and the brightest were being lured by NASA, to put a man on the Moon. 50 years later, the best and the brightest are being lured by the Silicon Valley, to sell ads on social media. Biggest anticlimax ever.

That might sound bad, but selling adds on social media is actually more useful for society as a hole and takes a lower percent of our GDP than the moon missions. As to cool tech, we are actually discovering earth sized planets orbiting other stars, that's IMO far more interesting that having people play golf on the moon and a lot harder. We are also getting ever closer to building things at the atomic scale. As well as consumer robots be they roomba's or self driving cars.

Not to mention stuff that's useful in space and at home. http://en.wikipedia.org/wiki/File:PVeff(rev120404).jpg

Wait a second. Isn't Neil working on a realistic sword fighting video game? Kind of hypocritical, don't you think?

Don't forget his employment at Intellectual Ventures -- which is largely regarded as a patent troll.

Do you have a reference for the IV link?

EDIT: Should have googled it myself. For reference http://web.mac.com/nealstephenson/Neal_Stephensons_Site/Inte...

Making a realistic sword fighting game would be quite the feat for the advancement of human creativity and virtual entertainment.

Not exactly spaceships, fusion, and feeding Africa, though.

I took that point; it's just the way you wrote it: derisively (sorry, that's just the most appropriate word; I'm not harumphing at you).

No worries, you make a fair point and I take no offense :)



I think the key point was diverted from. The employees aren't doing what they want anymore, so some stable "we can always get acquihired by google again when we fail" startup is attractive. As employee 3, they will walk away with a huge 0.5% of the exit while the founders walk away with 35% each.

how mouthy I was when I was 24

Welcome to The Bay Area: where self worth is measured by frat-like posturing and manipulation to level up at any cost.

Ahhhhh there it is. Whew. I thought there was a risk that this was going to be a boring civil conversation.

It's like hypoglycemia, but for upvotes.

Anti-success or "insiders manipulating the system" rants tend to bring the love. It's all Method. I'm just another SV washout.

Also, $6m really isn't that much these days. Might get you a nice house in the Silly Valley and a few years of living expenses, but that's not "set for life" money if you're in your 20s.

Hacker News is one of the few forums where being able to lock in a six-figure salary (100k USD) for 60 years isn't viewed as being set for life. The wonders of entrepreneurship and the cost of living in the Bay Area.

This always amazed me too. There will always be greener grass somewhere. I was surprised to find that my mid-west mindset could be so stark in comparison to some of the valleys. For me, two years ago my dream was to do exactly what I'm doing now: writing code at a reputable tech company and learning more every day. That, and I make enough money to do everything else I want if I don't blow it on an overpriced car or <insert status symbol>.

Building a company and walking away with 6 million is life changing. Too many people seem to think selling your company means you should never need to work again. What it means, is that you're freer to continue to pursue the projects you want. Seems like a huge inflection point to me.

None of us want to work for 60 years, particularly not for someone else.

Also, our Bay Area apartments cost $2M.

The parent comment is pointing out that a $6M payout is equivalent to 60 years of 100k salary, for no further work.

6MM is way the fuck more than almost anyone pulls out of their startup, but that aside, his point was you take the 6MM to buy breathing room for your next startup, which "really" swings for the fences.

What kind of money do people pull out of a startup, assuming VC funding? How big a salary are founders allowed to pay themselves?

Possibly true. However, I'd argue that the quantum difference between student debt and a few million in the bank is higher in terms of utility than the one between $5M and billions. Most of your money problems are solved with a few million: you get to work on what you want, can take a year off whenever, etc. You can still die of pancreatic cancer, suffer an ugly divorce, etc.

That's a different post, though.

This discussion seems to be mostly theoretical, so as someone who actually has $7 million, I'll provide my experience. In summary, not life-changing - my life is pretty much like the average engineer. I'm not spending like a rock star - your car, computer, stereo, clothes, etc are probably better than mine. (Although my house is a bit larger than average for Silicon Valley: 5br/3ba in an unfashionable city.) It's not enough money to feel even slightly important or rich in Silicon Valley. I don't feel like the "money problem" is solved; I plan to keep working for the foreseeable future.

I suppose I could move to somewhere like Kansas and retire, and live an upper-middle class life, but I don't see the point in that. (The "official" recommended spending rate of 4% would yield a high but not enormous income. Expecting 6-8% income is crazy talk.) The obvious HN answer is to start a company, but a) I'd be bad at it, b) I wouldn't enjoy it, c) I'd probably end up losing a pile of money, d) large opportunity cost, and e) health care.

Trying to summarize: the people who say a few million doesn't go far in Silicon Valley are right. It eliminates various problems (and I do sympathize with those with financial difficulties), but otherwise hasn't changed much for me. (Or maybe I'm just using it wrong.)

Are you serious? $6m sounds like more than enough to retire on at any point for most people.

assuming losing 30% off the top for taxes, taking 3% of the principle every year for "salary" is $126k. That seems like more than enough for me, too.

I would think the tax rate would be lower, considering that a sale of shares is treated as capital gains. 15%?

true. but that's only for long term. i have no idea what short term tax is, but i know it's also less than 30%.

i was trying to overestimate taxes (so that the reported annual income, if anything, would be less than actual annual income) and use a nice round number so i didn't have to use a calculator.

Long-term is holding the asset for a year or more. Short-term is treated as ordinary income.

true, but what's the interest rate for short term cap gains?

i know it's (15,30), but i can't rememeber if it's just 18% or something more like 25%. and since i am efficient (read: lazy :), i just overestimated to 30% instead of wikipedia-ing.

If you want to live like a 20-something for the rest of your life, sure. Your cost structure changes as you get older and have things like houses, spouses, cars, and children.

Do you have a house or kids? I do. The near-certainty that I could afford college, house payments, and a humane retirement would be an intense motivator for me. I'm not conservative by any means --- I work for a company I cofounded --- but I think it's easy to forget that adults like us live with a pretty fucking high cortisol load.

$6MM invested with a 6% return provides a $360k pa lifestyle just living off the interest. That seems like quite enough for houses, spouses (well—maybe spouse; alimony could eat into that quite a bit), cars, and children.

Zero risk return is way below 6% right now. I'm not sure where you're going to find anything like that.

Berkshire Hathaway is willing to guarantee you a $205,000 annual income from that sum in an annuity, which is not a bad deal at all, but it's not 'never worry about money again', it's just a really nice salary, and would be substantially depleted in the case of any inflation at all.

No need to go zero risk when the investment starts in your 20s. But of course, yes, inflation. But of course, you can draw from principal as well—that's how retirement funds usually work.

I'll put it another way: Maybe it's not 'never worry about money again'—people are prone to worrying, after all—but $6MM is more than the lifetime earnings of the vast majority of Americans.

If you can't make it on more than what nearly everyone else will ever see in their entire lives, that's your problem.

If a guaranteed six-figure passive income is not "never worry about money again", I don't know what is.

You'd have to worry about inflation. It can quickly turn that six-figure income into a low five-figure income in today's dollars.

Suppose someone said that to you in 1975, and you'd put your money into something that didn't adjust for inflation.

You'd be 37 years older and making less than 1/4 of the income, adjusted for inflation.

A mixed portfolio can provide both a solid annual income and a hedge against inflation. $6M well-invested in your 20s means you don't have to worry about money again.

Right now 10-year T-Bills are pulling about 1.65, and inflation is having a nice bounce between 1.7 and 3. Let's even it out at 2 - either way, yes, you're losing money on ultra-low-risk investments. All you can hope for is to reduce the wages of inflation on your balance sheet.

BH annuity is not a bad deal, but losing 2% of your income a year will sound tolerable until about year 5... =)

If you retire mid-twenties on $5M, there's no way you'd make it through 70 on that, if you did nothing else active (read: risky) to increase your income.

Let's assume your investments keep up with inflation but no more, which is very easy to do. Then essentially you are just living off of your principle. 5MM goes a long ways. 75k a year (in today's dollars) will last you 67 years. That's more than most people make. I'd take that.

You want to spend 50 years on vacation?

I said nothing of the sort.

Follow the thread UP, and you'll see it's the core of the conversation - as to whether one can live off of 6MM for the rest of your life. I call "ceasing working and living on the money you made previously" retirement, you can call it what you like.

Earlier in the year, you could get a 12 month CD in Australia for almost 6%.

The inflation rate in Australia was pushing 4% last year. That's a nominal return of 2.X%.

It's a real return of ~2%, it's a nominal return of 6%. "Nominal" in this case means "in name only" - it's the face-value of the return, not the actual value.

Nope, you can do it with $500k in a Colorado suburb for example. This guy is a living example of it, with multiple kids, multiple cars, a house, furniture, etc:


Most people will never make $6M in their lifetime. The average college graduate will make less than $3M when it is all said and done.

If you can earn more, great. But the chances are exceedingly low to begin with.

Bullshit. I live on roughly $18k a year net. buy a house, maybe doubles or PERHAPS triples my housing allowance. Have a wife and kids and things, in total, probably triple.

I don't think people understand how to not waste money any more.

Does this mean you're not going to be buying the new disposable laptops from Apple? How will you live with yourself?

I'd rather spend my time writing software then repairing my old socks. As a bonus, writing software makes me about 100x what repairing my old socks nets me per hour.

Where do you live? This is HUGELY dependent on geography. $18k a month in NYC, Seattle, SF, etc., is pretty painful. Add two kids, private school (unless you live in a great district), college educations, saving for retirement, summer camp, braces, health care for 4, housing for 4 in a good neighborhood, helping out your retired parents who might not have saved enough, etc., it stacks up pretty fast.

$18k/yr in NYC or SFBA with a mortgage and a family is untenable.

$18k/yr in most major US cities probably implies:

* Subsistence diet

* Dependence on small selection of rental properties

* Extremely poor access to health care

* Dependence on informal "gratis" child care

* Near perfect job attendance

I call these out not to make the boring "gnash our teeth about the lives of the poor" case, but rather the suggest that your ability to care for a family on 18k/yr in a US metro is counterfeit: you can do it until you:

* Are ever hospitalized

* Lose your free child care

* &c ...

... at which point bang you're bankrupt. I think a lot of people who think they are getting by with low incomes are actually playing a kind of sick inverted Martingale betting strategy against life.

Well my point is not that everyone should be able to live off $18k a year. My point is that You don't need $500k a year to live decently. I have a new car, a good apartment and amenities such as cable TV and xbox live. Certainly geography plays a large role in individual costs. But again, I'm not trying to say everyone should live on $18k a year. I'm saying I (a single fellow btw) do, and it's a satisfactory lifestyle complete with all the necessities and a few luxuries.

A modest house in the valley costs something like $500k. With a typical mortgage you can expect to pay about 1% of the total price ($5k). That's more than triple your total expenditures, let alone housing costs.

I assure you, it's quite possible to live an enjoyable life in a place that's much cheaper the valley.

If you have high expectations about the amount and 'quality' of your personal possessions, then sure. I'm sure most every one else can make due on that amount.

I think with wise spending and decent investments I could easily make that amount last my entire life and have quite a bit to give away at the end.

The acquihire is just the Dot Com Ferrari signing bonus of the new age. Except now you have to prove you can actually take risk and get shit done before they give you the Ferrari. Seems reasonable.

By now they have some traction: hundreds of thousands of users, some of whom are even real.

I wonder what percentage of users are generally fake and how much some startups goose this number. Maybe adding in 5% worth of fake users increases an acquisition price. I'd imagine it varies by the type of app (CRM, social, etc) but that you'd probably have to get your next funding from the Salvation Army if/when you get caught.

There exist companies where you pay $100 and get 1000 to 10,000 people (read: south east asians) to sign up to your service.

CEOs have been invited to conferences to speak about their "sudden rapid growth." They never admit they are cheating. You can usually tell who does it because their traffic will abruptly stop once they realize the 100,000 one-time-login users in Singapore aren't virally spreading or clicking on ads.

Anybody have any firsthand knowledge on how prevalent things like this happen? Seeing as how his company was acquired by LinkedIn, is he admitting this was his strategy?

You think he started a search as a service company because he was targeting LinkedIn?

Flaptor (the name of the company, IndexTank was the product) was a search consulting company five years before becoming a startup. I know, I was there.

a lot.

Concise, compelling and rich,- would read again.

But honestly, that sort of stuff rarely gets transcribed into Internet ink.

This is exactly why people consider the valley to be a huge bubble. This kind of "innovation" isn't sustainable at all.

But what makes it not sustainable? As long as there exist a few GooBooks, won't acquisitions continue to be sought?

The linchpin to the whole thing is the easy VC money. It's what makes both the few startups turning into GooBooks and the many startups turning into ZombiePlatypus possible.

As soon as the smart money that's currently focused on VC finds decent returns in other, less risky investment vehicles, the VC money train will stop. It's just a matter of time.

That certainly would cause the bubble to start losing air so-to-speak, but I'm not sure it would pop. If you think about it, Google and Facebook happen to be specific examples of companies that could have become billion dollar companies without VC investment. Other companies like Amazon and Tesla Motors are not.

Google becoming a billion dollar company without VC investment is possible, but it wouldn't have happened nearly as quickly, and it's quite possible that it would have been acquired by Yahoo or Microsoft.

I disagree completely on Facebook becoming a billion dollar company without VC. VC funding is what allowed Facebook to monetize much later and gain huge cash reserves by selling tiny portions of equity at extremely high valuations.

Were those cash reserves at Facebook used for anything besides hiring people to write advertisement monetization code? I was under the impression that the rate at which Facebook accumulated users would have been very similar to what actually happened had they just received angel investment and used the original employees.

Yeah, but only until the GooBooks realize that they are just paying a huge premium for acquiring talent (and a worthless product).

That assumes that the product is worthless and that they have alternative ways of acquiring equally valuable talent. The author of this article asserts that neither of those is true. The opportunity cost of developing the product in house is often comparable to or greater than the cost of the acquisition, and the talent acquired is not only really skilled but also already familiar with GooBook's way of doing things since they worked there to begin with.

A bit ironic that he sarcastically referees to HN as "Hacker Noise" but then at the end invites people to discuss the post on it.

I didn't interpret that as a dig at HN, any more than "GooBook" is a dig at Google and Facebook... He just changed the names to make it clear his story is fictional.

Is this the real story (and motivation) behind IndexTank?

Even if it is inspired on IndexTank the difference is that IndexTank was a very valuable service and ended being an open source project. We can think of IndexTank as a kickstarter project now!

Also Flaptor was a search consulting company five years before the startup.

Google, Bing and HN Search all think that "Hacker Noise" is a neologism.

"GooBook" and "SoSoMa" are pretty funny, but "Hacker Noise" is brilliant. A direct hit!

I'm curious, is the name "ZombiePlatypus" a reference to any specific recently acquired startups with monsters and animals in their names?

Zynga, Plants vs Zombies, and Minomonsters is what came to mind for me.

Hahah I've been wondering the same thing but can't come up with anything.

ZOMGPOP would be close.

By the way, how much of this post is IndexTank's own story?

As long as all the parties profit from this kind of business there is nothing wrong with it. See for example Android. Whoever thought it would be what it is for Google today for Google?

I nearly burst out laughing when I read "Hacker Noise".

Except this isn't how people are making 5+ million dollars in practice.

Sad, but true.

Sometimes someone says something true. When that happens, it has to be veiled in the appearance of a satire because no one wants to admit the world really works that way.

I've never been so glad I'm on the other side of the country..

If that is the price the world has to pay for the occasional google so be it.

This is easily one of the most honest and true posts I've read about Valley culture in a long, long time.

Having been through this exact process, I can assure you that this is how it really works.

The strange thing is it reminds me of the late 90s, the GooBook back then were companies like Cisco.

Would be interested in hearing about your process if you'd care to tell us.

> Having been through this exact process, I can assure you that this is how it really works.

Read OA.

What is OA?

Original Article?

If you look at all the people making 6 million dollar paydays, is this really how it works? I suspect not, but I don't have the data to back that assertion.

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