Advice to Startup Entrepreneurs. Just say NO!

After some excellent insight in a recent email from Jason Calacanis (a VERY sharp and successful startup entrepreneur), I revisited my working hypothesis about folks doing startups.   It’s a bit ironic since I did NOT follow this advice myself, but now it’s too late for me, and I’m doing pretty well.    

I do think Jason and other entrepreneurial geniuses like Mark Zuckerberg  are among the VERY few exceptions to my rule, which is this:

Smart folks should NOT bother with startups.   My “research” is only anecdotal but it’s fairly extensive with respect to  my own online efforts and the many startups and websites I’ve watched over the years, but I think the typical pattern is for smart entrepreneurial folks to invest many years and get only modest returns.    Few – and by few I mean probably less than 10% – are better off with their startup effort than they would be simply working for a big player like Google or Yahoo at 120k per year and saving like crazy.  

For a 25 year old, retirement with a few million can be had in an almost guaranteed way by age 50.    [math is simple here.   A 120k employee can easily save 40k per year over 25 years = 1,000,000. With very modest compounding this will be well over 2 million at age 50.   If you are married you can spend more or save more.

I’m doing pretty well myself as a moderately successful entrepreneur with a few decent websites, but even I’d I’d be much better off had I joined up with Google 10 years back (their stock is up about 1000% as well as paying big salaries.   I’d be a bit better off if I’d joined up with MS or Yahoo 10 years ago [no stock gain, but I probably would have made more money in salary than I’ve made as an entrepreneur).    

The many brighter-than-me folks who have NOT had success with their own startups would be dramatically up after 10 years with a big player.

I think the analogy are the gold miners vs the shopkeepers of the CA Rush of 1849.   Most miners left with little to their name, where the bar, brothel, and shopkeepers did pretty well, building the great state of California in the process.

So to summarize my advice to bright young entrepreneurial folks is to … take a deep breath and fill out an application to work for a big player in Silicon Valley.



TechCrunch 50 – winners or losers?

You won’t know what these companies are up to from the names, but soon most of the TechCrunch 50 startups will be online:

Thanks to live streaming of the conference it’s almost like I’m watching / listening right now.

I still think that the startup ecosystem is wildly unpredictable, and more like an evolutionary process where the losers drop out and winners bubble up as a result of processes that effectively swamp out factors under the direct control of the players.    Google, Yahoo, Myspace, Facebook and most of the huge success stories with online technologies not at all the product of tight, rational, “follow-your-perfect-biz-models”, instead their success were the product of social forces as much as technological ones or tech implementations at the companies.    I think this is even more likely as the number of new internet companies has mushroomed from hundreds per year to tens of thousands.

Of course the TechCrunch 50 is not simply a selection process.   By exposing the companies to key players representing billions in prospective venture capital, it is a surprise that virtually all of these companies don’t enjoy at least modest success.   This is only year two so it’s not clear how last year’s companies will fare ove time though early indications seem to suggest … not that much better than other startups.

More bad news for Startups and Venture Capitalists

More bad news for Startups and Venture Capitalists from the New York Times “bits” section about technology trends.    Not only is the number of IPOs falling (zero in Q2 of 2008), but it also the number of mergers or aquisitions of startups appears to be way off as well.

Venture capital folks look to the most favorable “liquidity event” and generally that is an IPO where they may realize tens or even hundreds of times their original investments.    Also favorable though generally offering less profit than an IPO is an aquisition or merger where other companies take over the startup without it going public.

I found this number very interesting and potentially alarming for Venture investors:  An average of 8.6 years from startup to IPO, the longest in some time.    Given that the present value of money is greater than future value, time horizons this long suggest, for example, that even a doubling of your VC money over that long period of time would represent only a “fair to poor” return compared to alternatives.   Given that most startups never go IPO anyway it would seem that the risk factor is going way up for these investments.

Amazon unearths some great startups

The Amazon startup contest here has a video profile of the seven finalists in their contest which I think was to showcase users of Amazon Web Services (AWS).   I think  Jeff Barr  will have more about this on his blog or on Amazon’s blog.

These look like some really interesting companies.    One is measuring brain networking, another is providing 19 usability testing (this is brilliant for the small website market!)  One is optimizing PPC campaigns (hmmm – but won’t Google analytics do that extremely well?.)

Venture Capitalism – luck or science?

Over at his excellent blog, A VC, Fred Wilson is bearing his Venture Capitalist soul and offering a lot of insight into his very successful VC firm.     Today, his analyses of why some startups fail sounded really compelling to me in the same way many stockpickers sound compelling.    Yet in the stockpicking world it’s common knowledge that past performance is no measure of the future.   In fact a lot of the ideas about “good” vs “bad” analysts are bogusly based on after-the-fact analysis of records.    Predictions, not after the fact stuff, are what we need to test hypotheses about what works and what does not.

Fred also has this post suggesting VC is not like stocks, but I’m not seeing data to support this.  In fact if he’s right – that the top VC funds can pick a lot more winners than losers – then why doesn’t *all the startup biz flow to them immediately?*.

My working hypothesis is turning into the following ideas:

Winning VC firms are like winning stock pickers – they for the most part are the firms  hat were at the right place at the right time.   The winning record is NOT the product of conscious, clever, consistent application of any sets of rules.    It is simply the product of math – you’ll have a top tier by definition.  

I also apply this rule to my own successes and failures in biz and life in general, though I always catch myself thinking I can “outwit” chance.    I think egos get in the way of good analysis about the world, which suggests a lot less control over things than we’d like to think.    This is still in the working hypothesis stage and I have not reconciled that fact that I can predict with enormous accuracy that, for example, I’ll be drinking coffee tomorrow morning, yet I can’t even tell you if Google stock will be up or down tomorrow.

NO – you can’t time stocks either, and I’ve got huge money to bet you if you think you can predict stock up and downs even slightly better than chance. 

With stocks when you use a performance record you don’t find good predictive relationships between the past and the future.   Many people think they *do* understand those past to future issues, but in the stock world this does not hold up to scrutiny.  If it did, staggeringly huge returns await anybody with even very modest  level of long term predictive power and a modest initial stake.   How?   

If you could predict the daily up or down movement of any stock  with even a modest level of accuracy you could use options (or buying short and long) to quickly turn a buck.  If the stock was highly volatile and options were available your leverage would turn a few thousand into a few million in a year thanks to leveraging of your success percentage predicting the up or down movement.   If you could predict things with high accuracy – well above chance – you could turn thousands into millions every month.    This does not happen.  

I’m open to a disproof or alternative hypothesis for VC firms.   But don’t tell me about successes and failures  – I want predictions.   There will  *always* be a top tier of winners.   What supports my hypothesis is that those winners change over time and past does not predict future (in Stocks – I’m really not up on VC stats except that the average returns are negative).  

I think VC may have more of a schmoozing human component than stock picking so that may play a role here.   I’ve noticed from the few Venture Capital folks that I know how they tend to be very bright and personable.    Yet even this is somewhat conspicuous given that average VC return is negative, where the average bright personable person is doing well.

Venture Capital: Fred rules but his 3x rule is too optimistic! ?

Fred Wilson’s got a fascinating post about his history of investments over at Union Square Ventures.   Of course he’s got every reason to post his results, which appear to be exceptional although he has left out a key factor in his little analysis, which is time.  I note over there:

Fred, these are impressive results and to my understanding much better than average VC returns, which are negative, right? Don Dodge posted min-analysis some time ago where he wound up concluding there was a lot more VC failure than is normally thought.

There are elite guys like you and Jeff Clavier who “beat the averages”, but isn’t “making money” with startups an unrealistic expectation, since those VCs and companies that succeed are still around to talk, but those who fail are not blogging about the burgers they now flip to pay the bills?

I’m also noting that without “time” as a factor the return is not meaningful. 3x is easy….if you use a 15 year horizon!

At a very modest annual return of 7.33% one would expect to triple an investment in 15 years.     A 10% return will leave you with 4.5x your initial investment in that same time frame.    More dramatically, if time is not a factor then I’m happy to guarantee you a return of, say, a million percent.  It’ll just take a while.

This isn’t to suggest Fred isn’t a great investor because I think he is the exception to the normal rule in Venture Capital, which are low returns.   After I wrote about Don Dodge’s suggestion that average VC returns appear to be negative  Jeff Clavier also suggested in a blog comment here that only the top 25% of VC firms are averaging positive returns, and this really shook up my understanding of things.