Good lecture: Important content, well organized, clear.
But, but, but: It looks like there is a kind of a bus or bandwagon, and after this lecture I'm thinking of either not getting on or just jumping off before going too far.
Sure, YMMV.
More generally, I'm concluding that for information technology start-ups, Silicon Valley equity funding is on a long walk on a short pier, about to go the way of the Dodo bird.
E.g., the lecture told me that the Silicon Valley way is awash in onerous, nearly intolerable, often seriously dysfunctional, financial, legal, organizational, etc. overhead that is unnecessary and should be dumped into SF Bay and forgotten about.
Instead, with some irony, I remember the advice of Ron Conway in Lecture 9
http://startupclass.samaltman.com/courses/lec09/
in praise of bootstrapping.
My view: Be a solo, technical founder. Plan the start-up; get a computer; write the software; own 100% of the business; organize as a Sub-chapter S or LLC; get users/customers and revenue; do not accept equity funding; grow the business; smile all the way to the bank; and totally just f'get about VC, liquidation preferences, pro-rata rights, vesting, reporting to a board of directors, a Delaware corporation, etc.
Vesting: That's where a solo founder who owns 100% of a business -- and it's got to be a pretty good business before it qualifies for VC equity funding, e.g., see (5) below -- has the business take an equity check and suddenly owns 0% of the business, to start to get back some ownership gets a four year vesting schedule with a one year cliff, takes on a lot of expensive, onerous overhead, and reports to a BoD with people with a fiduciary responsibility to (themselves and) their limited partners, that can fire the founder for any reason or no reason (thus costing the founder his unvested stock -- do that in the first year and the founder gave his business away to the investors for a small salary for a few months and $0.00) who are non-technical and the founder would not want to hire in the business, who do not write code, who commonly claim they have "deep domain knowledge" (an outrageous belly laugh) and, really, do not understand the business. Total bummer.
To me, if a well qualified technical founder believes that he needs co-founders and/or equity funding, then, instead, he should think of a better business idea that doesn't need those and that he can do as a solo founder.
Some really good news: The US is just awash, border to border, crossroads, villages, ..., to the biggest cities with successful businesses 100% owned by solo founders. Indeed, from all I've seen, it is mostly just such founders who own houses, vacation houses, super-cars, boats, and jewelry worth $1+ million each and pay full tuition for K-12 private schools and Ivy League colleges. E.g., own 10 fast food restaurants, several new car dealerships, a good independent insurance agency, be a successful dentist, have a good construction firm of larger buildings, own and rent real estate, etc.
Further, actually can do fairly well in coin laundries, pizza shops, Chinese carry outs, landscaping, ..., even just grass mowing and snow plowing.
And of course these solo founder Main Street, USA businesses nearly never have VC or even equity funding.
Even better news: What can be done in principle, and sometimes in practice, with a computer that costs $2000- and an Internet connection with upload speed of 25 Mbps is just staggering, nearly beyond belief. E.g., there was the Canadian romantic matchmaking start-up Plenty of Fish, long just one guy, two old Dell servers, ads just from Google, and $10 million in annual revenue.
Five points:
(1) For more, a big lesson of the Altman course, YC, and VC is that there is a big risk of disaster from co-founder disputes but also a big theme of don't be a solo founder. Maybe there are some good reasons investors don't like solo founders, but I can see big reasons well qualified technical founders should want to be solo founders.
(2) For more, this latest lecture and much more, e.g., John Doerr from KPCB, keep saying that ideas are easy, plentiful, and worthless and that execution is challenging, risky, and everything.
My version would be, good ideas are challenging, rare, valuable, and nearly everything and, given a good idea, execution is routine and reliable.
It appears that Silicon Valley (SV) believes that an idea is just some one sentence product description a founder might explain to his neighbor and regards everything else as execution. So, it appears that SV fails to understand what else should be in a good idea. No wonder on average VC has poor ROI:
http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...
But a good idea might be based on some original research, secret sauce, challenging for others to duplicate, and be protected as a trade secret or with a patent. Some people believe that some trade secrets and patents are valuable assets, maybe just crucial to the business, and not easy, plentiful, or worthless.
So a founder wants to report to a BoD that believes that ideas are worthless? What about some original and solid ideas for much more effective ad targeting? Easy? Worthless? Gads.
(3) For more, VCs keep saying that a start-up that claims that they have no competition is just silly, that there is always competition or at least near substitutes. Let's see: What about the original Xerox 914 copier, a license to print money?
(4) For more, there is the common claim that whatever a start-up is doing, it is not the first. Hmm .... Suppose we take the set of all efforts that did the same thing and there consider the effort that was started with the earliest date. Then that effort contradicts the claim.
(5) For more, some of the VC arithmetic doesn't work out:
E.g., once Menlo Ventures wrote me that they would not consider an investment in my work before I had 100,000 unique visitors a month. Okay, assume (a) each month, on average, each unique visitor comes 5 times and each time sees 8 Web pages, (b) each Web page has on average 4 ads, and (c) get paid $1 per 1000 ads displayed. Then the monthly revenue would be
100,000 * 5 * 8 * 4 * 1 / ( 1000 ) = 16,000
dollars. If the site soon has 100,000 unique visitors a month, then maybe soon it will have 1 million and, right, $160,000 a month.
But the CapEx to serve 1 million uniques a month? Let's see:
That would be an average of
1 * 10**6 * 5 * 8 / ( 3600 * 24 * 30 ) = 15.4
Web pages a second. Even if need, say, CapEx, of 30 servers at $2000 each, that's just
30 * 2000 = 60,000
dollars to get revenue of $160,000 a month. So, buy the servers in the first month and just use them in future months.
I can understand that a start-up with 100,000 unique visitors a month and five co-founders, each with a pregnant wife, might very much want some equity funding. So, be a solo founder.
In simple terms, by the time a solo founder has a business of interest to VCs, he has high motivation just to continue to own 100% of the business and f'get about equity funding.
With points (1)-(5), I see a pattern: Denigrate founders.
Net, I'm missing why good technical founders should want to be on that bus.
Yes, YMMV.
> it's got to be a pretty good business before it qualifies for VC equity funding [...] has the business take an equity check and suddenly owns 0% of the business, to start to get back some ownership
The core value proposition of VC equity funding seems to me is enabling the business in the first place, or at least taking the business to places it could otherwise never reach. Obviously, there are lots of cases where that simply isn't necessary - and nobody likes to take on unnecessary equity holders if they don't need the money.
But if you do need the money, it's not a surprise this comes at a cost. People who invest in companies want to make sure those companies have a decent shot at succeeding. The vesting scheme is designed to incentivize founders to keep working on their company, and if that looks very similar to vesting schemes early employees get that's not an accident.
The same goes for your more general criticism of SV as a location. There are startups where this is simply not relevant. Nobody wants to move their life and business to another (more expensive) location if they don't expect it to be better there. But for a certain type of startup, the expectation that SV is better than any other part of the world is absolutely justified.
Everything is a tradeoff. It makes sense to evaluate these tradeoffs carefully. Money has a cost. Optimizing your opportunities (usually) has a cost. Sometimes you need investors to succeed, sometimes you don't.
To put it bluntly, if I can become the next Facebook while sitting in my garage in Vladivostok not talking to anybody, there is absolutely no reason to move to Silicon Valley and give away most of my company. That's a big if, though.
I'm just gonna comment here...
I agree with you when you say ideas are actually worth something. When investors say ideas are worth nothing, execution is everything that's very self-serving. The idea wasn't theirs, so of course they want you to believe the idea is worth nothing. Also, the suggestion that all co-founders should start with equal shares, regardless of how much work they put in and whose idea it was, this is also very self-serving. This just makes it easier for the investors to boot one of the founders if needed, and does not serve any other purpose. This video should be taken with a grain of salt.
Everything in this series should be taken with a grain of salt [1]. If truth in advertising were required of course names then the title of this series would have been "How to Start a Start-up to maximise the return for SV VC".
1. I am not being critical of the content (well not most of it) as there was lots of valuble information, but the lack of anything other than one perspective of how you should start a start-up.
Solo climbers make a number of first ascents in alpinism, but almost everything is done by teams. When you're working by yourself, everything goes well when things are going well, but when things go badly, there's nobody to turn to for support; you're working without a rope.
I'm a soloist by nature, but I've learned that I need to work with others. The mutual support of a qualified partner is almost priceless, for you and for them.
YC, and the startup culture in general, appears to have noted a strong correlation between multiple founders and success. It also sounds like founder breakups are common. These two observations are compatible.
Ideas do have intrinsic potential value, but that value cannot be unlocked without execution. You may have an idea that sequences DNA with absolute fidelity in ten seconds for $1. That idea has an intrinsic potential value of many billions, but if it can't be brought to market (or to proof-of-principle, to sell the idea to others), that value cannot be converted into currency.
I tried a co-founder. He had a lot to offer. But too soon he wanted to do no work and be a bitch on the team. So, I had to break off with him. "Co-founder disputes"? Yup, they are likely.
The result is, I've just had to do more of the work, say, serially instead of in parallel. That's not all bad: (1) I understand more of the work, really all of it, because I did all of it (the co-founder and I broke off before he contributed anything). (2) I saved time and effort coordinating with a co-founder.
Sure, a VC might say, "That your candidate co-founder didn't do much suggests that he was not really impressed with the project. In that case, neither am I."
But there's another explanation: Often some people just don't want to get along.
To get someone to work reasonably hard, one approach is to have a big, successful company, pay enough to support a wife and family, and have the wife with two young kids and with one more in the oven. Two guys in a garage don't meet this criterion.
I'm plenty motivated; he wasn't. My view is, for as much as he had to bring, still he had some serious flaws in his character.
So, find another co-founder? Not so easy. Easier just to do the work! For a co-founder, some of the usual recommendations are to select someone with good paper qualifications and have known and worked well with for years. Okay, my list of such people is exhausted. So, net, I'm a solo founder.
Again, the US, border to border, from crossroads, villages, and towns up to the largest cities, is just awash with solo founders of successful Main Street sole proprietorships. So, for a business where the initial work is just typing code into a computer to be used as a Web server, being a solo founder seems fully promising to me, even if VCs don't like it.
I should point out that $1.60 revenue/user/month is really high, unless you are addressing a marketable niche like engaged women.
Facebook has half that revenue per user, and that's with powerful targeting options and a userbase that spends a lot of time on the site/app.
Thanks for the info on the $1.60.
I don't yet know the details of how Web sites get paid for running ads.
Of course, at venture firm KPCB, the Mary Meeker reports commonly claim that a Web site can get paid $2 per 1000 ads displayed -- additional details are missing. In my arithmetic, I assumed only $1 per 1000.
For Facebook, I don't get it: With some irony, for people who saw the movie, I find the f Web site brutal, excruciatingly brutal: I can't make any sense out of it -- I click and click, the response is really slow, and then the screen jumps around to whatever, why, to what, I have no idea. What the heck the "timeline" is, I have seen no definition, can't make sense out of it without some investigation, and don't want to do that. If Zuck wants to have some obscure UI/UX, good for him, but I'm not impressed. There are lots of goofy icons I can't spell, pronounce, look up in a dictionary, see clearly enough to recognize anything, etc.
For ads on f, I don't get it: To me Zuck is running f as some weird thing with little or no interest in ad revenue. If he is getting paid by the click, then so far he's made $0.000000 from me.
My Web site is all about niches, really just niches, for each user who arrives, as in drill down, zoom in, filter out, focus in on a highly personalized niche, for some quite fundamental reasons likely by a wide margin the most finely grained, personalized, niche-oriented Web site on the Internet so far and for a long time in the future.
And, yes, I have some associated ad targeting ideas.
So far, my UI/UX is just simple, dirt simple, childishly simple, about the simplest possible HTML with minimal CSS simple. So, no pull-downs, no pop-ups, no roll-overs, etc.
And, no icons! Wish I could stand on Mount Everest and shout with transcendental ecstasy louder than the blast from Mount Pinatubo "no icons!". Right, you guessed it; oh how you guessed it; I deeply, profoundly, bitterly hate and despise icons! No icons! At last, at last, free at last, no icons!
The screen never jumps for any reason. All the layout is from, right, just tables, with all sizes fixed and exact in terms of pixels.
The UI/UX is simpler than that of HN. ASP.NET writes a little JavaScript for me, but so far I have yet to write a single line of it and am eager to continue this way.
The UI/UX is so simple that a child of 6 who knows no English could learn to use the site in about three minutes just watching an adult, and an adult who knows no English could guess how to use the site in about two minutes. We're talking much easier than, say, Microsoft Word. And since the site is in English, for people who know English, sure, it's still easier to learn.
Each Web page is just exactly 800 pixels wide with high contrast and large fonts. The site should look fine on any device with a Web browser up to date as of about five years ago -- I'm not counting, maybe 10 years ago.
We're talking simple and, thus, really easy to use.
Each Web page sends for about 400,000 bits so that in a Web browser each page should load and format like "boom" or "pop".
Then, on each Web page, there is a banner ad of the standard size 720 x 90 pixels and down the right side an average of about four ads in the standard size of 300 x 250 pixels. And the ads do not get in the way of the utility or hurt the UI/UX. So, we're talking ballpark five ads per page.
Looks to me, page for page sent, compared with f, my pages are nearly a license to print money.
And, per user, the assumptions I made in the arithmetic should be okay for the users that do like my site. And some users, in the word in the movie, will find the site "addictive" -- something like a new game, and more addictive than, say a slot machine. The usage is highly interactive, especially for the part about drill down, .... One candidate early enhancement is a curious way to calculate a reward for skilled usage!
It looks like the main issue will be, will 2+ billion people like the site?
If people do like the site, then it looks like I have a shot at getting more revenue per user per month than f. Also my UI/UX is much easier to use than f! Heck, f's too tough for me! My hat's off to you, Zuck; I can't understand your Web pages or your site.
But thanks for the info on the $1.60. I've been writing software, nearly ready to start polishing and then go live, and collecting some initial data. Details of ad revenue will come later.
Great post and I agree with nearly everything you have said especially on the importance of the idea. Good ideas are rare and valuble. If you think an idea is nothing then you don't have a good idea.