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Ask HN: Is an Autonomy Fund a viable business model?
49 points by michaelochurch on Apr 19, 2013 | hide | past | favorite | 45 comments
Here’s a software business model that helps engineers to retain control of their companies and aim for excellence, instead of having everything they build get hijacked by MBAs. It encourages engineers to build profitable companies rather than “get big or go home” (VC).

It’ll encourage mid-growth companies. See: bit.ly/16guxvy. I want this thing to generate some Real Technology, and focus on hard problems instead of social media bullshit optimized for instant results. It’s for the mid-risk 10-40%/year growth range that’s underserved by existing finance.

An Autonomy Fund’s like so: engineers get a base salary (say $125k) and the investors get a percentage (say 37.5%) of any profits they make. What do they work on? Whatever they want. Their own projects. Consulting. Startups. The fund owns part of it, but they have full autonomy over what they do.

One idea here is self-organization. If two teams decide to work together and pool resources, they can. Since they're collectives of autonomous individuals, they don't need to worry about the (morale-killing) processes of merging HR structures and org charts. They just pull together and work.

Who’d fund it? I think local governments might. (Am I right? Or off the mark?) It creates jobs, supports local businesses, and may build the next Facebook.

I see this as the ultimate symbiosis between cities and tech. They want to make their cities tech hubs instead of having all the action go to star cities. We’d vet programmers, something a non-programmer can't (cf. Design Paradox).

I'd aim for top-5% “10Xers”, with initial class size ~28 and a 2-year initial runway ($7 million). If the pilot succeeded, then similar funds could be launched all over the world, and there might be a business in setting cities up with their own Autonomy Funds.

Is this something that:

(a) local governments would support, and

(b) a substantial number of top-5% people would join, even if it meant moving to a small city (~50-250k inhabitants)?

It's a nice idea, but focusing of technical excellence for its own sake is dubious according to me. If I were offered to put my own money in that project and get paid in dividends after couple of years (we want long term investors), I would probably refuse, as there is no business plan at all. Whoever has money to invest will focus first on the product, and then on the technical quality. What you want is rather:

1. write good code

2. ???

3. profits

Also, you will need to attract non coders, such as domain experts or marketing. They will also want their shares of the cake, and you will need to pick good ones, which will not be trivial for you as a developer. I am sure there are many other flaws, and I'd rather suggest that you use your technical excellence to "scratch your own itch" and live from it.

If I was putting my own money in a project I'd definitely prefer the top 50% programmers with good organizational and interpersonal skills and concrete business plans over the top 5% developers who might just use their near-market salary to contribute to their favourite open source projects and work on esoteric problems that interest them. (I'd pay more attention to technical ability with "VC-istan" growth expectations and incentive structures)

I have a feeling that organizations part-funded by governments that hire intellectuals on near-market salaries to work on projects that interest them (and do the odd bit of teaching) already exist: they're called universities. I realise the plan here sheds a layer of bureaucracy and gives the productive a slice of potential profits they generate, but I think the comparison is reasonable, and I certainly wouldn't pump money into academia with the expectation of collecting returns on it.

Very good points. Thanks so much. I welcome disagreement because, without it, my ideas would stay in a raw crappy form. So... here are my thoughts.

My end goal is for this to congeal into something like an open-allocation environment, but one that exists across companies to some extent. I feel like if we bring OA to the external market, we'll force the hands of employers who will have to improve conditions if they want to compete for talent. So, the trans-corporate open allocation (because each person carries an income that follows her whereever she goes) is the ultimate end goal. That may be completely insane, but isn't that what the open-source gift economy is-- trans-corporate collaboration?

Getting designers, marketers and domain experts will be hard. I grant you that. Strong designers and marketers I can spot; domain expertise I would not be able to tell, unless I had it myself and, of course, for most domains I won't. I think that to get a domain expert, you'd have to hire her into a company already formed through this process, because you're right that there's no way we can build up a competent selection process for every domain we might care about.

I am not sure I get your second paragraph, but it seems to me that you want to build some kind of consulting company owned by top coders. Your offer would be to offer programming services, that only very competent programmers could do. My guess for such services would be: ultra scalable web apps, or creation of DSLs - it has to be something very advanced in order not to compete with the numerous consulting companies that are already existing, most of them doing mediocre stuff.

And I can see this taking off. Obviously not fast because most of your potential customers wouldn't even know yet they need your services, but that should be able to slowly bootstrap. And I suppose once you would have built a strong team and gotten some notoriety, you would be able to bootstrap your technological edge into some concrete product.

Having said that, I still have some doubts, mainly because I think we are in a coding bubble, and the future belongs less to the programmers than to the engineers who will build the new space rockets or the technology to exploit green energies from example, while with the standardization of functional programming and the development of various libraries it will be easy for a non programmer to start creating software components that are currently requiring programmers (IMHO there will be less "pure" programmers and more "X's who can program" as you once said here on HN).

Nevertheless I wish you can succeed with your idea, even though I don't think I'll be able to work in your company as I am not a top programmer.

I think you might be barking up the wrong tree here - OP's plan is to create an investment fund that focusses on long-term investment in talented people, rather than the VC approach of investing in "whatever facebook/twitter/google might buy to acquihire the founders".

The problem is that most local governments that want a tech hub are either focusing on tech already and will think they don't need this, or are on the other end of the spectrum and simply don't care.

The key is to find a city on the cusp of making a serious decision to pursue becoming a tech hub. Google Fiber could be an incentive, or it might make them complacent, who knows? Maybe Provo? You can't really aim too small, small towns have serious conservative budgets and for good reason.

Austin would be nice, I'm not sure how insecure they feel about their status as a tech city compared to NYC and SF. What I can tell you for sure is that they are seriously affordable. You can trivially get a house for less than $200k in a decent neighborhood. That they're already competing for the tech city thing is a bonus.

Google Fiber in Austin could end up bringing in some fresh blood, even if it doesn't make that much of a difference on its own.

Austin has a $3.1 billion budget, which makes this more feasible for them than a sub-$1bn budget city. $25mm planning and development budget.


See here to see their job development efforts.

Anything involving as much money as this does is going to have be sold as a job development play. I don't know if that argument can be made yet or not, I'd need to discuss it.

Disclaimer: I'm headed to Austin as soon as I'm freed up in my consulting work to do a startup.

Just an observation: My understanding is that SF used to be affordable. That was part of its attraction. Than SV happened and that was the end of that.

Getting Austin to sign up for that would be a huge coup. I don't think you'd have any trouble getting great engineers to move out there, given how many strong tech companies are already there. That would be ideal. But I'd also want to talk to other municipalities and see what terms they'd have to offer.

It's definitely a job development play. These engineers are going to be founding companies that, if successful, are going to employ large numbers of people.

This sort of idea is really interesting to me, and the thought of it happening in Austin is quite tantalizing (I wouldn't have to move!).

I find it pretty hard to function in typical management structures, though I work better with teams/some sort of external visibility (my personal projects tend to gather dust too easily, though I'm working on improving this). The concept of an incubator-like environment for collaborating on ideas without the extreme focus on growth would be a perfect fit for people like me.

Copying my comment from here: https://news.ycombinator.com/item?id=5578223


How about Las Vegas? I've never been there but:

1) Cheap airfare, international destination

2) A Party Town, probably helps the gender balance in one aspect, people would like to visit you.

3) No Income Tax

4) Still close to the SF Bay Area

5) Never cold, barely rains (good or bad depending on your preferences)

6) Really cheap real estate. Buy a townhouse for under $100k!

7) Many tech conventions are hosted there

8) Driving from one corner to another takes only 30 minutes according to google maps.

Vegas also has the distinction of being Tony Hsieh's experiment to revitalize the LV downtown core[1].

Autonomy Fund on the surface looks like a great fit with Tony's DowntownProject vision[2].

[1] http://www.forbes.com/sites/evankirkpatrick/2013/02/13/lesso...

[2] http://downtownproject.com/

I would love to see something like this. I think this shouldn't just be limited to one city or industry though. Assuming that this is successfully attempted in one city, it might be a good idea to try it in other cities while focusing on various industries that speak to the existing core competencies of that city. So for example, a Detroit version of the Autonomy Fund could focus on funding autonomous individuals within the automotive industry.

As for choice of initial tech hub, my vote goes to Pittsburgh. The population size is [roughly] what you're going for at ~300K. The housing market here is great. It already has a tech-friendly local government. Plus Carnegie Mellon is here, ready to feed top young CS talent directly into the autonomous positions.

For what it's worth Pittsburgh was also voted as the most livable city in the U.S. a couple years ago [1]. I might be biased since I live/work in Pittsburgh and take CS classes at CMU, but by that same token it also means I'm speaking with first-hand experience.

[1] http://www.marketplace.org/topics/life/news-brief/its-offici...

I don't think Pittsburgh has the funding to do it. You're looking at a budget of ~$450mm.

I think the funding, rather than the locale, is the blocker here.

How much money do you think it'll take? I'm thinking single-digit millions per year. First class would be about 28 people. So that's $3.5 million per year.

Salary plus tech budget is $125,000. That's half-decent but not great, and by design. I'm looking for entrepreneurs, not salarymen (who'd command $150-250k at the level I'm looking to hire). It's not the extreme low salary of bootstrapping (negative including business expenses) but it's not cozy either. That's sort of what I'm aiming for: a middle path between might-fuck-up-your-family-life-bootstrapping and not-really-an-entrepreneur-VC-funded-salaryman.

I'm also thinking that it would be useful to find private investment with 1:1 matching. So local governments would only have to kick in half the initial funding requirement

Assuming total compensation of $200K, 1:1 private/public funds, cohort of 28 gives a yearly burn of $5.6M ($2.3M for the local municipal to raise) for, say, 5 years = $28M (3yrs = ~17M) during (or hopefully after) which they want to see a payout coming directly from the AF's revenues.

You mentioned 37.5% earlier, but the city would probably expect you to model this in such a way that X% will be duds, so their return will most likely be much lower than 37.5%. 10x-100x VC-istan-like hits should not be banked on given the sole purpose of the Autonomy Fund is to create medium-growth companies (10%-40% p.a. growth rates).

Perhaps factor in a legal, HR, accounting, IT and facilities teams for AF-backed individuals (i.e. backend G&A organizational infrastructure) @ 10-15% and your baseline burn rate should be adjusted accordingly. Let's say $6.5M per year, of which $3.25M comes from municipal/state/federal public funding.

But doesn't it cost more than $125k to pay a $125k salary? I've been told that it's about 1:1 if typical benefits are involved. So a $125k salary costs $250k.

Not sure why you'd think benefits are involved here. And a $125k salary does not cost $250k.

It would be great if an HR director could weigh in on how much a $125K salary might cost in total compensation with a "standard benefit package" range for a technologist/programmer/engineer role.

The only other data point is from the Bureau of Labor Statistics Employer Costs for Employee Compensation (BLS ECEC) where it shows at the bottom that benefits accounted for around 30% of total compensation and 70% going to wages & salary[1]. On average, this means that a $125K salary would cost a company $179K overall.

[1] http://www.bls.gov/news.release/ecec.nr0.htm

It doesn't cost that much either. [1]

[1] Ex-CTO

Those ratios are for average salaries, not $125k salaries.

Pittsburgh would be a great choice, I agree.

Do you think the local government would invest?

As I work on the idea, I'm starting to realize that it needs to involve public and private investment. The problem seems to be to convince investors that we can audit the programmers. I'd probably need to hire a well-known programmer as, at least, an advisor. Even if he didn't want to make the decisions and conduct the interviews, it'd be huge to have his name on the letter.

The cities where I see the best odds of this taking shape are: Austin, Pittsburgh, Madison, and Portland. Apologies if I missed one; there are plenty of other good places, but those are the 4 that would be the big targets.

I agree that one city is just a start. The concept needs a pilot, but ultimately the goal isn't to make one specific city a new Silicon Valley (if that happens, I've failed) but to encourage more equidistribution of talent and, as a nice side effect, also squeeze out the real estate assholes (who take advantage of the fact that our career needs force us to crowd into expensive cities).

Once it's going multi-city, though, I'd need someone else to run it. I could be the lion for a couple years, but eventually I'd want to get back into code.

I think the hardest part would be getting the people funding it to agree to it. The plan, as you've stated it, gives them very little control of how their funds are used. I don't think it will be easy to convince the investors to trust the engineers not to just take the salary while producing nothing useful. If you can find a way around that problem, you might be on to something.

Maybe I'm naive here, but I think most software engineers (especially good ones) are careerist enough to want to produce something useful. That doesn't mean that there won't be some good-faith failures, but I think most engineers are already naturally aligned toward wanting to add value.

Top engineers aren't that way when a company takes 100% of the proceeds and a boss takes all the credit; but this is still allowing engineers to get a 62.5% cut.

I think with proper vetting you would be able to find engineers who would put in an honest effort in those circumstances. I just don't think it will be easy to convince investors of that.

Ah yes, Theory X and Theory Y. I would like to believe that defection rates will be low. Are people going to abuse the system? Occasionally, yes. My feeling is that the defection rate will be low enough not to compromise the project. If someone uses the fund to build his career, then goes off to the Valley, good for him. "Alumnus Bob is now VP/Eng at Facebook" is part of our pitch.

The trust issue is why local governments might be the best place to start:

(a) they know they're not technologists and can't evaluate 10x programmers. I can. I think I can either (i) establish that I can, or (ii) bring someone more established and better than I am to do the vetting.

(b) even if they fail, much of the money goes back into the city, which means it's not totally spilled on the floor. Fail case: those tech bozos made fools of themselves, but they ate at local restaurants for a couple years.

It wouldn't only be local investors. I don't want short-term investors in this, though. I'd take a Buffett-esque approach of having the share price around $50,000. Value investors only, because talent takes time to ripen.

Two thoughts.

(a) It will be hard to get $7 million for an untested investment model like this. It would be easier to start with something more like $150k, like the first YC class.

(b) It's hard to advise people on something you haven't done yourself. If you first started a successful mid-growth company, you'd find it a lot easier to raise money for this plan.

Let's see: government funds for projects that have little to no regulation, oversight, or concrete goals. Yeah... good luck with that. I mean, is there any precedent for this?

And I actually like the idea!

Ctrl+F "teaching".

If we set up a "20/20" plan where the entrepreneurs spend 15-20 hours teaching (as in, the public) while they draw a salary, then it might work.

The only danger is that it pisses off the teacher's unions. It'd have to be a free after-school program.

Your return structure is wrong :-)

A successful growing business is never profitable, most / all the profit is reinvested in the business. There will per se be no investor return relatively speaking.

I recently saw an article this past week that suggests a better structure: the investment is a loan that is forgiven if the business folds.

This is actually better for both sides: the investor gets their money back with some fixed return if the biz succeeds, and the business doesn't have to pay it back if it fails.

Then it becomes a small tech business entrepreneurship Loan/ investment vehicle. In which case the pitch to the city is the their investing in furthering local biz growth in a way that has potential to have a multiplicative return for local industrial base.

Tl;dr no small privately held biz is ever truely profitable, structure it as a forgivable loan upon biz failure.

In my company, profit sharing is 1/3 employees, 1/3 owners, 1/3 goes directly back into the company for investment. However, sometimes the company needs money to repair some equipment or whatever, and that comes out of the revenue (before profits). So the business needs come first obviously, but when times are good the employees are treated very well. This works best in companies where the employees can have a direct affect on short-term profits.

Yes I agree with that. But profit sharing with employees is per se taken from revenue left over after operating costs and such, profits are what you distribute to share holders.

I agree with what you're saying, I'm mainly quibbling with the language of the structure of the proposed investment instrument. It would be very easy to do some Hollywood style accounting so that the business owner and employees all get a fraction of gross revenue after costs, but any investor would get zilch for all time.

I know little of accounting, but I know that much :-)

(This is of course orthogonal to the ethical / moral dimensions)

That's a good point, which I hadn't thought of.

That is actually quite a bad arrangement.

Unless the fixed return is something intolerable to the startup, such as 100% return, that would make a terrible investment. Even ignoring the go-big-or-go-home type of startup in SV, the vast majority of startups that seek to make profits from day one do not succeed - they'll fail and the investors lose the loan. The only situation in which this makes sense is for the loan to have a very very high return - usually a multiple (1x, 2x, etc), since investors will need that rare winner to subsidize the losers. This is how the entire VC industry in SV works, and it definitely still applies even if you want to make a profit-first company, it just applies to a sightly lesser degree (usually for VCs in SV, one company in their entire portfolio will need to deliver 50x+ return). This is also bad for the startup because now they have this loan that they have to pay back in X years that has a huge interest rate.

Essentially, this is bad for investors because investors get all the downside, but their return is quite capped.

Yes it's bad, but it's still less shitty than Hollywood accounting based revenue sharing. This is also not suitable for the vc round sized capital, but rather the micro seed /angel money as done by the YC heterlogue that Michael is suggesting.

Uh... the fact that this arrangement is less shitty than $OTHER_INDUSTRY really has no relevance to my point. Seed and angel economics mirror VC economics. This arrangement sucks for seed/angel investors as well.

Michaelochurch, I've read a bunch of your blog posts concerning alternatives to VC funded startups and I have a question for you. Why raise any funding at all? Instead why not save a year or so's living expenses, pick a niche market, do contracting in that area and then try to OpenSource and productize a common problem that a bunch of your clients have. This approach is very similar to what 37 signals does and seems to work for some of my friends.


Software Engineering, done this way, does not require a lot of capital. What are your thoughts on this model?

Great idea. I'd actually submit Rochester, NY as a candidate (I'm from there, but live in Seattle now). The property taxes are high, but the cost of living is very low, power is very cheap, land is cheap and there is RIT and University of Rochester right there pumping out fantastic engineers (an hour away is University of Buffalo, not quite as good, but has a few gems). I know a few people doing startups there (it's tough because of funding, but these guys self fund). It's also not too far from Boston / NYC if you needed to grab people from there.

I wonder if the Kauffman foundation would be interested in partnering. http://www.kauffman.org/

It's an interesting idea, but I don't think local governments have room to pay lots of engineer salaries for no specific reason. Startups are risky and this will smell even riskier since it scans politically as a boondoggle. $125,000 is 5 working-class jobs. I don't see cities directly 'creating' jobs by just paying people to do things.

So, maybe don't depend on local governments.

Or, here's an idea (that might be politically explosive, or really cool): the funding is contingent upon teaching local school students (at various grade levels) programming (which is still not part of the curriculum in most public schools)-- a 10-15 hour per week commitment. This does mean that we must select for people willing to teach, but as far as I'm concerned, if you're not a good teacher, you're not a good leader and I'm not interested in funding you.

Now, public school students are getting after-school coursework with "Silicon [V]alley technology entrepreneurs". These aren't techies getting thrown a bunch of local money to build their careers; they're getting thrown local money to build businesses and teaching students how programming works in "the real world"

So then, there's a great service provided that is of use to the community even if the startups flop.

You might want to look into Startup Chile as a model as close to what you are describing as I can think. Equity free money to build things, with little oversight, and the only stipulation is giving back to the community. This usually happens via public workshops at universities, etc.

It's only 40k USD and only 6 months and the location isn't desirable for westerners to perm relocate and doesn't select for the top 5% of engineers but it's close.

Let's say that each programmer is responsible for a programming club at a public school. Reasonably the club would meet 3 times a week, and would be 2 hours per session. Homework would be assigned, which would need to be 'graded', so you could easily expect 10 - 15 hours a week for the teaching commitment.

Now, how many students would you be able to handle per mentor? I agree that teaching is part of leadership, but few team leaders have had to teach a 100 people at the same time. Maybe 30 per mentor?

Of course, after a year or two the senior students could help as mentors.

Who would join? Since it's a club, students will expect it to be fun. Granted, there are sports, band, cheerleading, etc where it is accepted that there will be hard work involved. They each have some kind of payoff, like games and concerts. I guess the club would be broken down into coaching and development sessions to teach skills, and then projects to develop them. You would want the projects to be something that the students could show the rest of the school, like a website or toy app. It would need to be small enough to be completed during a semester and could be done with the help of the art or A/V club.

How will a professional programmer feel about all of this? Yes, it is rewarding to teach, but at the same time you would be working with teenagers with varying levels of commitment. You're selecting for a very special type of person now, that is a programmer with vision, leadership skills, and that actually enjoys being around young adults.

I could see this working with small groups: 5 to 10 highly motivated students that already know the basics of programming hacking together apps with the help of a mentor. For those who don't know how to program yet, maybe work with the local colleges to open up programming courses similar to Vocational programs or Post Secondary Education Opportunities to learn the basics and earn college credit while still in high school.

I don't think cities or towns have either the money to invest nor the knowhow to administer such a thing. I think it would likely have to be investor-led, preferably wealthy technologists, who would then shop it around to local governments.

Hmm. That may be right. But I think something real is here, especially now that I've added in the teaching factor.

Do you know anyone who'd be able to look at this idea as a potential principal? My email is michael.o.church at gmail.

Tony Hsieh might be a good fit given his vision with Downtown Project (http://downtownproject.com/).

I love this idea but the idea of tying it to your locality seems a little exclusionary for no reason. Granted, I am biased as I am based in the UK, but I can't think of any major problems with organising this through teleconferences?

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