VC less superiority bar, entrepreneurs are not you can not

This article, written by Paul Graham at the end of 2005, describes the four challenges VC faces and the two possible solutions. Although nearly 10 years have passed, but this article for the current stage of venture capital is still a reference, in the domestic creation circle is still a lot of money chasing a few excellent start-up companies, and VCs have to face the start-up companies do not carry out financing directly by large companies to buy the challenge.

In the next few years, VC funds will find themselves battling pressure from four. VC hands have a lot of money in the internet during the boom has not had time to use. But this does not mean the end of the world for VC itself, but it actually reflects a more extreme form of internet investment: too much capital chasing too few projects.

Unfortunately, these few projects are becoming less expensive now, as it is becoming cheaper to set up a start-up company today. Four factors contributed to the situation: open source software, which allows entrepreneurs to use software for free, Moore's law, and hardware facilities are becoming cheaper; the development of the Internet itself makes it easy for startups to advertise on the web, as long as you're good enough to be noticed; better programming language, This makes the development process more economical.

When I started my 1995-year career, the top three of these factors took up most of my expenses. We had to pay 5000 dollars for Netscape's commercial services system, which was the only software that could be used to support secure network links. We also pay $3000 for servers with 90 MHz and 32 bits of memory. Just looking for a PR company to advertise for our new product, it cost us 30000 dollars.

And now these three are not a matter for the entrepreneur. Not only are you able to use free software, but the waste computers that people throw into the rubbish heap are now more powerful than the most advanced computers we have ever had. In the promotion aspect, as long as you really can make the good product, just with the online Word-of-mouth brings the traffic will be 10 times times better than when we find the public relations company newspaper propaganda to bring the effect.

Of course, a major change for many startups is that programming languages have grown tremendously. For most web startups more than 10 years ago, the development of software programs meant that 10 programmers were required to write code in C + +, but in today's job you just need to recruit one or two programmers with Python or Ruby.

During the dotcom boom (about 2000 years ago), many people predicted that internet start-ups would outsource their development work to India. But I think the better way to go in the future is to work in a more powerful programming language like David Heinemeier Hansson, the founder of Ruby on rail. There are a lot of famous apps like BaseCamp that are written by a single programmer. Using a person is certainly much cheaper than recruiting 10 people, and first he doesn't have to waste time in a team communication session, and second, because he is probably the founder himself, he can not work for himself without a penny.

Because startups are so cheap, VCs often give startups more than they expect. VC always like to invest millions of dollars a one-time. But a VC once told me that he invested in the start-up company only spent 500,000 of dollars. "I don't know what we're going to do, maybe just waiting to get the money back," he said. 」

Another thing that makes VCs more difficult is the Sarbanes-Oxley Act. The bill was enacted after the dotcom bust, and the introduction of the bill has added a huge regulatory burden. In addition to at least 2 million dollars a year of compliance costs, the bill also makes the company's relevant personnel frightened. "I don't want to be a CFO in a public company anymore," he concluded, with an experienced CFO I met. 」

You may think that responsible corporate governance can make people not deviate too far, but in any law you are likely to take evasive action in order to be less restrained, and the Sarbanes-Oxley Act is sure to affect the business. My CFO friend is very intelligent and upright, and if Sarbanes-Oxley is no longer willing to be the CFO of a listed company, that is enough to prove the impact of the bill on companies.

Many startups are no longer seeking listings, a big part of which is influenced by the Sarbanes-Oxley Act. For pragmatism's sake, entrepreneurs will think that a successful takeover is also a success. That means the VC has struggled to find a promising start-up with only two or three people to support and invest, only to be bought by other big companies with 100 million dollars. VCs naturally don't want to do this kind of business, but it seems to have become an unavoidable trend.

The VCs are far more troubled, and the acquirers are now savvy enough to realise they can start early.

Why wait until their favorite startups are invested by the VC and the price becomes more expensive to buy? Most of the things that VCs bring to these startups are the unwanted baggage of the acquirer. Buy-Out firms already have brand awareness and human resources, and there is no need to get them from startups. What the acquirers really want is software and developers, and that's what early startups do: they're usually made up of several developers who are focused on software development.

Google was the first to realise it, and a Google spokeswoman publicly said in the entrepreneur Academy: "Bring your start-up company to us as early as possible." "google's intentions are clear: they like to buy startups that are about to start a round of financing (the start-up company's a-round financing is often the first round of financing that VC can participate in, which usually happens in the initial year of the company's inception). This is a very smart strategy, and other tech giants will soon try to replicate the model unless they want to see Google eat the fat first.

Of course, Google has a unique advantage in buying startups: a lot of people in the company are already rich, or simply sell their stocks and become rich. Ordinary employees are not willing to accept the company to buy a start-up company such things, when you are still honest work to get wages, see a gang of 20 in the head of the young man has been rich, the heart should be how angry ah. Even if the acquisition of a start-up company is the right thing for your company, you still won't be happy.

Solution:

From the present point of view, the situation is so bad, the VC must find a way to save themselves. They can take two options, the first will not surprise them, but the other looks more like a curse.

Let's start with one of the most obvious alternatives: lobbying for Sarbanes-Oxley to loosen controls on listed companies. The law was designed to prevent future events like Enron, rather than destroying the IPO market. When the law came out, no one could see how bad the bill would be if the IPO market was already half dead from the previous dotcom bust. Unlike in the past, the technology industry has recovered from the last bust, and we can see clearly that Sarbanes-Oxley has become a bottleneck for these start-ups to go public.

Startups are like small, fragile saplings that are worth protecting because they will grow into big trees in the economy sooner or later. The growth of the real economy will drive startups, and I believe most politicians understand that, but they don't know the fragility of startups themselves and how easy it is for them to be hurt by a bill that was meant to solve other problems.

Even more dangerously, even if you hurt startups, there's a two-bit of protest because they're not. If you step on the sore feet of the coal industry, you'll hear loud protests right away. But if you squeeze the entrepreneur out of the industry, you may not hear feedback, just let the next person who can build Google as a great company not start a business but go on to grad school.

The second solution that I offer for VC might shock them: let the founders of startups get some cash in a round of financing. At this time, when VC invests in a start-up company, all the shares they get are new issues, and all the money is directly invested in the company. VC of course can also directly to the founder to buy this part of the stock.

Most VC objects like religious teachings. They don't want the founders of startups to get a son unless the company is sold or listed. VC are all control freaks, they are always worried that if the founders have money they will not listen to their control.

This is an extremely stupid practice, in fact, it is good for the company to let the founder sell a part of the stock early, because it will make the founder's attitude towards risk and VC is consistent. If the old fashioned way in which the founders are not earning a penny now, the founders ' attitude to risk would be diametrically opposed to VC: 10 million dollars compared to the 20% chance, the founder of nothing would prefer a 100% chance to get 1 million dollars, and VC out of "rational" considerations, Tend to be more fond of the latter.

In any case, the founders sold the company early rather than into A round of financing, but the former could get them some money back. For self-made people, the first bucket of gold earned in life is more valuable than the money they earn in the future. If the founders were able to sell some stocks early on, they would be happy to take VC investments and bet that they would get a bigger payoff in the future.

So why not let the founders get their first 1 million dollars, or at least 500,000 dollars? VC can also get the same number of valuable stocks. So why not give the founder a little bit of money instead of insisting on investing in the company's business?

Some VC think that let the founder take money such things are simply unimaginable, they want to put all the money into the company's business to allow the company to develop. But the fact is that the current amount of venture capital is the demand of VC funds ' own asset structure rather than the needs of start-up companies. Often these huge investments are more damaging to startups than to their growth.

It is a good business for the angel investors to sell some of their shares to their founders when they invest in startups. Angel investors will get a huge reward for their investments, and they are certainly happy. And for the founders, they are freed from the anxiety that their company is not succeeding, and that anxiety can only be distracting, rather than being the driving force of progress, as people usually think.

If VC is afraid of the idea of a founder, let me tell you the more frightening fact that you are now competing with Google for startups.