Matt Maroon - But Seriously(mattmaroon.com)
mattmaroon.com
Matt Maroon - But Seriously
http://mattmaroon.com/?p=557
62 comments
It was only stretched so that the bottom axis shared the same scale as the first graph. The scales match, so unless I'm missing something, the second curve isn't wrong at all...
Just imagine this comment thread for a moment as a series of videos you have to click on and listen to the author slowly waffle.
Scary isn't it.
Edit: Also, funny comment from their crunchbase profile: "The twitter killer as I have blogged few minutes ago. It has video, video is web2.0, it will kill twitter."
(Sorry for being slightly offtopic from the main points of matts post which seem to make a lot of sense)
Scary isn't it.
Edit: Also, funny comment from their crunchbase profile: "The twitter killer as I have blogged few minutes ago. It has video, video is web2.0, it will kill twitter."
(Sorry for being slightly offtopic from the main points of matts post which seem to make a lot of sense)
I never watch any of these videos, honestly.
It's easy to read, understand and rebut text. Video is still very much a one way medium.
It's easy to read, understand and rebut text. Video is still very much a one way medium.
Quite scary; I'd never get anything done! Not quite as scary as Jesus Camp, but I digress...
All the Seesmic comments I have actually bothered to click on have been people reading from scripts or bumbling through a thought that ends with saying nothing. Cut out the middleman and just give me the script in a much more efficient form.
All the Seesmic comments I have actually bothered to click on have been people reading from scripts or bumbling through a thought that ends with saying nothing. Cut out the middleman and just give me the script in a much more efficient form.
Yeah, text really is so much better for comments. I don't really care for Seesmic's product, as you probably guessed, for just that reason.
Founders, on the other hand, have the competing interest of reducing variation. They’d generally be happy to make a $30m mean return with zero variance. In fact, they’d often be happy with a much lower return and a much lower variance.
Ding Ding Ding. Somebody gets it.
Ding Ding Ding. Somebody gets it.
But not too low. The limiting case is an employee, who gets maybe $100k return with close to zero variance. Most of us are entrepreneurs because we wanted to take on more risks than employees in exchange for greater rewards.
Exactly, and that's why you need to be very careful with hiring. If you give one of your early employees 1%-5% equity, getting bought for 10-100 MM just doesn't cut it. After taxes, fees & TPS said employee could easily walk away with under $1 million (even if you're bought for over $100 million). This is still obviously awesome, but is probably not the upside that many potential hires are expecting.
I always took it as a given that employees will not get rich off an acquisition, unless the company is a Google or Netscape or Stratus (and even then, only if they were management-level and hired fairly early on). I did the math on my last equity offer (as an employee; not counting cofounder offers): I would've ended up with about $5000 worth of stock in a best-case (~50M) acquisition. My former coworker was an early employee of CCBN, purchased for $40M: he ended up with $3000.
Both founders and employees need to be very aware of the different risk/reward structures for each. I've heard some founders complain about how hard it is to get decent, hardworking help. Well, of course it is - their upside is 1/10th of yours! And their downside is lower as well, since they usually take a market-rate salary. People are less inclined to put in herculean effort if they have no incentive to do so.
For employees, be very cognizant of how much risk the founder has actually eliminated and make sure that fits with the reduced reward. It's really, really hard to build something people want: if they've already done so, they deserve every bit of those outsize founder stakes. But if all they have is an idea and some VC funding, they're asking you to bear many of the same risks, yet leaving you with much less of a reward.
The takeaway, IMHO, is don't hire and don't take VC money until you have product/market fit. That gives your employees a risk & upside profile inline with their equity stakes. It also gives your VCs an acceptable return without them forcing you into taking outlandish risks, eg. going after that pie-in-the-sky market opportunity.
Both founders and employees need to be very aware of the different risk/reward structures for each. I've heard some founders complain about how hard it is to get decent, hardworking help. Well, of course it is - their upside is 1/10th of yours! And their downside is lower as well, since they usually take a market-rate salary. People are less inclined to put in herculean effort if they have no incentive to do so.
For employees, be very cognizant of how much risk the founder has actually eliminated and make sure that fits with the reduced reward. It's really, really hard to build something people want: if they've already done so, they deserve every bit of those outsize founder stakes. But if all they have is an idea and some VC funding, they're asking you to bear many of the same risks, yet leaving you with much less of a reward.
The takeaway, IMHO, is don't hire and don't take VC money until you have product/market fit. That gives your employees a risk & upside profile inline with their equity stakes. It also gives your VCs an acceptable return without them forcing you into taking outlandish risks, eg. going after that pie-in-the-sky market opportunity.
Hmmm ... those numbers are kind of depressing. But I had kind of come around to the same conclusion. Unless you are a founder, it's just not worth it most of the time.
Depressing? All this are saying is: Unless you're a founder, you're an employee. Earlier employees are closer to the founder end, later employees are closer to the employee end. Neither are probably going to retire at 23 from an early acquisition. The latter are probably not even gonna retire from a monster exit (though in this case there are probably more employees, early is relative).
They do have a chance at making quite a lot of money though. 3k/40m is less then 0.01%. So it's not really a big part of the compensation package. In that case, stock just isn't a reason to work there. There may be other reasons to.
It's depressing that being in the vicinity of a startup doesn't make you rich? If everyone was rich, it wouldn't be rich. By definition, it's not available to everyone. You think market rates + a 50% chance at being millionaire, should be the going rate?
They do have a chance at making quite a lot of money though. 3k/40m is less then 0.01%. So it's not really a big part of the compensation package. In that case, stock just isn't a reason to work there. There may be other reasons to.
It's depressing that being in the vicinity of a startup doesn't make you rich? If everyone was rich, it wouldn't be rich. By definition, it's not available to everyone. You think market rates + a 50% chance at being millionaire, should be the going rate?
I tend to following your line of thinking, but "you" is different than "many people". :)
Agreed; we're not.
Agreed; we're not.
Well, that depends on the individual situation. A micro-ISV could bring that number as low as a reasonable salary. A startup like 37Signals needs to have that number high enough to support a small number of employees. Of course, a VC backed firm counting on a grand exit needs a much greater reward.
I think what Matt correctly points out though is that by limiting yourself to the VC option, you are only seeing 1/3 of the avenues available to you. These are limits for the VC, but they don't need to be limits for a founder.
I think what Matt correctly points out though is that by limiting yourself to the VC option, you are only seeing 1/3 of the avenues available to you. These are limits for the VC, but they don't need to be limits for a founder.
Only because the market ensure we have to though. We'd rather take on greater rewards with no more risk.
Not always true. There is the rare founder who is an "empire builder"-- the kind of guy who wants to do crazy ambitious things like build a railroad across the country (or the software equivalent). Bill Gates and Mark Zuckerberg would both qualify-- both have had ample opportunity to walk away with $30m.
These are the founders that investors want (including YC) - the $30m exits are just to "keep the lights on" if you do the math.
These are the founders that investors want (including YC) - the $30m exits are just to "keep the lights on" if you do the math.
Right, but you're focusing on the exception. He's focusing on the rule.
I'd like to see a VC firm that kills it from dividend payments instead of _soley_ exits/IPOs (maybe one exists?). You'd need some very "open" limited partners.
I'd like to see a VC firm that kills it from dividend payments instead of _soley_ exits/IPOs (maybe one exists?). You'd need some very "open" limited partners.
can we settle for a high return and a very low variance? :)
Um, no. :-)
Sometimes you can, until the rest of the market catches on and bids up the going price until you have low return and low variance.
Matt's mostly right, but the mathematical conclusions are, depending on how generous you want to be, minorly misleading or flat out wrong.
Leaving aside the incorrect graphs and potentially wrongly chosen distributions mentioned elsewhere, Matt missed the real reason VC's and entrepreneurs have different risk profiles.
Entrepreneurs have one company they're rooting for--their own. VC firms have tens or, over the course of their lifetime, perhaps hundreds. The law of large numbers says that as you sample more (with more companies), variance around the mean reduces, and you're quite likely to end up with your expected value at the mean. The entrepreneur has no such safety blanket and so would clearly choose to reduce variance.
Leaving aside the incorrect graphs and potentially wrongly chosen distributions mentioned elsewhere, Matt missed the real reason VC's and entrepreneurs have different risk profiles.
Entrepreneurs have one company they're rooting for--their own. VC firms have tens or, over the course of their lifetime, perhaps hundreds. The law of large numbers says that as you sample more (with more companies), variance around the mean reduces, and you're quite likely to end up with your expected value at the mean. The entrepreneur has no such safety blanket and so would clearly choose to reduce variance.
You still wouldn't want more variance even with a larger sample unless with it came higher EV too.
I know my graph is wrong (think I mentioned that in the post) since 0 should probably be the likeliest result.
I know my graph is wrong (think I mentioned that in the post) since 0 should probably be the likeliest result.
Yeah, the reason VC's can stand higher variability is the aggregation, but the reason they want it is approximately your argument, that the distribution makes it so that their worst case is not that bad, but their best case is great (due to the clamp at $0). The wide range of big payoff possibilities must raise the EV, but the individual entrepreneur doesn't care because of the variablity he can't take.
VCs also can stand the variation because they get paid even if they fail. Were VCs paid only a % of the profits, and had to reimburse for failures at the same rate, you'd see their risk tolerance drop greatly.
Also true, though their LPs do get paid only on the profits (less the aforementioned management fees). If they weren't comfortable with the risk, they wouldn't invest, right?
Yeah, though they can invest in many high risk VC funds much the way VCs invest in many high-risk startups. Harvard's endowment, for instance, is ~$35 billion. They're risk-tolerant on a level that Sequoia can only have wet dreams about.
So though VCs will be less risk-tolerant due to sample size than entrepreneurs, LPs will be that much less than VCs. Even the best VC firm is only a few poorly-performing funds away from the scrap heap.
So though VCs will be less risk-tolerant due to sample size than entrepreneurs, LPs will be that much less than VCs. Even the best VC firm is only a few poorly-performing funds away from the scrap heap.
All probability density functions must integrate to 1.
Even if the peak for non-VC was raised, it would still be too simplistic. This is probably more like what the probability distribution looks like:
http://www.dabbleboard.com/main/public?created=dummy8&my...
VC is characterized by large probability spike at $0 and 0 probability at intermediate valuations. Non-VC (i.e. what founders typically want) is closer to a single-mode normal distribution.
Though Matt's point (and his graph) about mean and variance are correct: VCs -unlike founders- only care about mean because they can diversify with a large number of startups.
VC is characterized by large probability spike at $0 and 0 probability at intermediate valuations. Non-VC (i.e. what founders typically want) is closer to a single-mode normal distribution.
Though Matt's point (and his graph) about mean and variance are correct: VCs -unlike founders- only care about mean because they can diversify with a large number of startups.
Your graph is probably closer than mine, but the odds of a 1x return aren't 0 at all. I think Fred Wilson said the odds of a mediocre return are like 1/3. VCs abandon ship when it looks to be the correct play just like anyone else.
IMO abandon ship == near-$0 valuation. Although I didn't know about the 1/3 odds of a mediocre return (defined as 1x?) for VCs. The main point of my (admittedly still simplistic) graph was that the VC probability distribution is bi-modal.
I would assume mediocre meaning something like 5.x-2x or something. I don't remember exactly, but I definitely know that startups that fail are often sold and VCs get some money back. And some that didn't fail but didn't really succeed and don't appear to have much potential sell for not a lot either.
That's true. I realized the left side of the curve had to look different.
Thank you for figuring that out.
I swear I have the worst timing ever. I go to college just as the .com bubble crashes, and now that I'm planning my jump into startupdom everything crashes again.
Oh well, there's nowhere to go but up, right?
Right?
Oh well, there's nowhere to go but up, right?
Right?
Actually, you probably have the best timing ever unless you want your name associated with things that people gnash their teeth at. :-)
not really, flickr, stumbleupon, clubpenguin started when .com bubble crashed.
crises do spurr ground-breaking technologies and new ways
crises do spurr ground-breaking technologies and new ways
Starvation is a spur to success.
Well, it certainly won't be an unsurmountable obstacle.
Depending on who you ask, I'm either persistent, stubborn, or muley.
Depending on who you ask, I'm either persistent, stubborn, or muley.
Maybe matt should look at http://en.wikipedia.org/wiki/Maxwell-Boltzmann_distribution.
That made my brain hurt.
From my limited understanding of how VC works, I would think that both distributions (curves) should be bimodal with one mode at zero rather than being normal distributions.
For the higher variance distribution, the mode at zero should have a higher probability than the mode at zero for the lower variance distribution. You might also expect that the second mode would occur at a higher valuation in the high variance distribution.
For the higher variance distribution, the mode at zero should have a higher probability than the mode at zero for the lower variance distribution. You might also expect that the second mode would occur at a higher valuation in the high variance distribution.
Poignant observations as usual, Matt. Thanks for the link as well.
Of course you can build an online business that depends on paying customers and be profitable from day 1 like TicketStumbler, but since when is it any easier?
Day 75. Revenue since Day 3.
Only if Day 1 was launch day (which it never is). Don't do funny math. :-)
Nope. Day 60 was our public launch day.
We actually had revenue before we were launched from our blog (no actual site was even up). It was a pile of shit.
Two Stone Temple Pilots tickets I believe.
We actually had revenue before we were launched from our blog (no actual site was even up). It was a pile of shit.
Two Stone Temple Pilots tickets I believe.
Curious, once you get bigger you're going to butt up against all of the anti-scalping laws that are up there, as well as the ticketmasters of the world that are going to contend that you shouldn't have the right to complete with their monopoly. Have you thought about what strategies you'd use at that time, and if so, would you care to share them with us?
This is purely for my own curiosity, I don't have interest in this space or anywhere remotely close to it.
This is purely for my own curiosity, I don't have interest in this space or anywhere remotely close to it.
Short answer: No we won't because it's not our problem.
Long answer: We don't carry any inventory or process any transactions - we just show the results of others. Our ticket providers could run in to problems (they have in the past already), but enough deals exist that we'd still have ticket providers.
Stubhub, Viagogo, Ticketsnow, Seatexchange, Ticketmaster et al are already working on agreements with the teams/leagues. For example, MLB has already signed a deal with Stubhub.
Ticketmaster/Ticketsnow is one of our providers. They are not a direct competitor because they are a primary ticket market - we are a secondary ticket market aggregator. Our main competitors are TickEx, Ticketwood & Fansnap along with some unlaunched ones I'm not supposed to know about it.
Most places ignore the anti scalping laws because they're retarded. When demand exceeds supply, prices go up. No one ever complains about all the below face value tickets found at most NBA and MLB games.
Long answer: We don't carry any inventory or process any transactions - we just show the results of others. Our ticket providers could run in to problems (they have in the past already), but enough deals exist that we'd still have ticket providers.
Stubhub, Viagogo, Ticketsnow, Seatexchange, Ticketmaster et al are already working on agreements with the teams/leagues. For example, MLB has already signed a deal with Stubhub.
Ticketmaster/Ticketsnow is one of our providers. They are not a direct competitor because they are a primary ticket market - we are a secondary ticket market aggregator. Our main competitors are TickEx, Ticketwood & Fansnap along with some unlaunched ones I'm not supposed to know about it.
Most places ignore the anti scalping laws because they're retarded. When demand exceeds supply, prices go up. No one ever complains about all the below face value tickets found at most NBA and MLB games.
Great answer, thanks. You certainly know your marketplace! :)
It isn't easy, but it's far easier. I know lots of people who've done it (hell, I have a couple myself).
> when you count the big corporations that aren’t going anywhere (Google, Yahoo, MSN, Myspace, Facebook, YouTube, Amazon, eBay, etc.) and the porn sites (with which you cannot compete) you have a lot of dogs fighting for very few scraps.
WTF? Facebook and YouTube didn't even exist 5 years ago. Good to know they weren't thinking the same way.
WTF? Facebook and YouTube didn't even exist 5 years ago. Good to know they weren't thinking the same way.
I wasn't suggesting that nobody new will crack it. Just that very few will. 2 qualifies as very few.
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A (truncated or folded) normal distribution is completely inappropriate here.
"You've got to pull the weeds if you want a beautiful garden" classic.
-P
-P
This is more than just a pedantic observation -- it's an illustration that the VC way leads to a lower probability of success at the most common valuations, but a small chance at a much higher valuation.