His billion dollar marker is drastically high. He has been living in dotcom fantasy land for far too long.
There's no reason you can't raise $250k for 25% from an angel investor, to build a $10 or $20 million business. That's a helluva result to put it mildly. You know, building an actual business that produces actual profits, not vaporware built-to-flip companies that produce nothing and only exist in a tiny corner of the economy.
The stock market hasn't moved in real terms in 13 years or so. Interest rates are on the floor. Any investor outside the big VC game would kill for a 10 or 20 fold return over 10 or 20 years. There's a beautiful thing called dividends, which a successful business can pay to its owners. Dixon doesn't seem to know anything about that however, as his assumed scenarios require the big exit and ignore any other possibilities.
If you take $250k, and you build a $10 or $20 million valuation business, it's not difficult to kick off a very nice dividend to the investor that provides a stellar return on their capital. AND if you ever choose to sell, said investor also gets their big exit as well. You can also buy their stock back at the higher valuation and they get their exit that way. These types of results are common in the real economy, but not so common in the fantasy dotcom economy.
This comment is an exemplar of how not to behave on HN.
It is as insulting ("dotcom fantasy land"? "Dixon doesn't seem to know anything"?) as it is wrong: Chris's post is explicitly about "the VC model" as opposed to "investors who are less aggressive about returns". Since he's recommending that fewer startups pursue that model, you could hardly have missed his point more completely.
But it's the tone that is inappropriate, that sharp-elbowed nastiness that strives to pack something mean in every phrase. I know it feels good to write this way; I've done my share. But it really is like peeing in the swimming pool, and not underwater either.
Chris is not talking about this. He's talking about venture capital, where (1) you typically need to raise at least $2M (otherwise the firm can't justify the board seat), (2) the money for the investment came from a venture fund that was raised from limited partners, and the fund's lifecycle is structured such that the investments need to see liquidity within 5-10 years.
As for angel investors, the angel deals you hear about on HN and TechCrunch work differently from what you're talking about. They don't buy common stock and they wouldn't receive dividends even if you paid them. Instead the angels receive a debt instrument that turns into series A preferred stock once you raise venture capital. If you fail to raise venture capital, the angel writes off the investment as bad debt and walks away. Historically these deals wouldn't even fix a value on the company, though the conversion caps that are now in vogue are effectively valuations.
One reason it's done this way is that just the legal fees for issuing series A preferred stock easily run to $50-75k. That money is spent drafting the protective provisions that make the stock "series A preferred" rather than "common". Another is that, historically, angels have found that the big wins are so big that they make the rest of the portfolio irrelevant.
So sure, if you can find an angel that will buy $250k of common stock in a tech company that has no chance of a big upside, go for it, but I think you're going to be looking for a long time. Of course you're right that many businesses are financed through small common stock deals, but these are more often small businesses like your local restaurant or auto mechanic, where the business model is well understood but there is no chance for this 10x return on capital you mentioned, and the money usually comes from friends and family, not from professional investors.
More succinctly, if you're able to build a $20M business on a $250k investment, the money to build the business came from your customers -- you've used customer financing, which Chris described in his blog post as the most desirable form of financing.
I doubt a business going from 0 to $20M in <5 years while paying out millions in dividends along the way is common anywhere. You have to remember that for investors it's all about IRR. That kind of IRR on the 1 out of 10 investments that gets to that level isn't interesting to any real investor. Your focus on profit and dividends is misguided. Taking money out of a company in its early stages is a suboptimal strategy for value creation.
I rewrote my comment several times to make it less rude, but your advice is completely wrong and I hope nobody seeking investment follows it.
Is IRR really the thing VCs are trying to optimize? Since they're once and done with the money, and have limited bandwidth (board seat capacity), I think total returns are their goal -- they'd rather have their $500mm fund make $2b investing 100% vs. have their $500mm fund invest only $250mm total in its lifetime and make $1.5b.
Writing down a loss on a purchased company is not a taxable benefit at all. They are writing off goodwill and intangible assets which were acquired when they purchased a company, and this has no tax consequences. Maybe if they wrote off tangible assets, they could accelerate the depreciation, but it's most likely that all of the write down is in goodwill and maybe intangible assets.
A mix of desperation, and having no idea of what you're doing. Hats off for Steve Ballmer
Goog payed 2B for DoubleClick right? Funny thing is that "everybody knew" who DoubleClick was, but I'd say it was hard to find someone to have hear about aQ before the acQuisition.
That's not the way "free market" is understood by the vast majority of people. In your version of a free market murder is also a common business strategy. Google could just kill any engineer who dares to work for a competitor.
No one wants to live in a world like that. So when we say "free market", we mean a market with an agreed-upon set of rules that everyone is aware of and that are generally followed and enforced.
The problem is that a lot of people spouting "free market" demagoguery don't practice your definition. Rather, it is indeed "anything and everything they can get away with".
There is also strong correlation with people intent on telling other people how to live their lives. (Even and all the more so when this ends up through revelations and evidence being a "do as I say, not as I do" type of message.)
One of my problems with so-called "free marketeers", is that so many of them are outright hypocrites.
Sigh. Trending too far towards the political, here on HN. But people, including many technical people, need to look at, analyze, and take apart free market arguments and statements, to see what parts are true and/or work and what parts don't.
I myself favor broadly but fairly strictly defining spaces and rules within which private enterprise can compete relatively freely. But, private enterprise does not become the final arbiter of same.
That's what studies I recall seem to have indicated. Regulation works well in broad strokes. It falls down in micro-management. But you paint those strokes strongly, and you don't let the competitors step an inch over that line without consequences. (Even if, sometimes, the consequences are a re-evaluation and adjustment of the regulation. Sometimes, the times really do change.)
If you let private enterprise loose entirely, you end up enabling the eventual establishment of quasi-states -- perhaps to eventually become de facto or real states. Autocratic states, by the nature of their structure.
I'm not sure we really want, or are willing to concede to the inevitability of, a Gibsonian near-future. Yet.
As for the regulation. It should all be open. With the world an ever shrinking place, private actions simply are no longer isolated. When company X pollutes watershed Y, it's no longer just a matter of their bottom line. Even in resulting settlements, court procedures, and arbitration, non-disclosure should not be a legal option for them. Shine the light of day on these bad actors. And shine it on government failures that enabled them.
A bit idealistic. But, IMO, better than "all hail free markets".
P.S. If you think markets are free, try following jobs across national boundaries. There is no worldwide "free market" in labor. (Something a bit less obvious to the highly skilled than to the rest of the world labor force.)
There has been talk about Google stealing Yahoo back away from Microsoft on an ad deal, so that would also be another reason. It could be worth hundreds of millions per year to land that deal with Yahoo. The legal hurdles are huge though.
There's enough prior art to demolish this easily. It won't even remotely hold up under legal scrutiny if it's ever used by Apple in a lawsuit. I think this is a complete non-issue.
Its a non-issue for you if you happen to have a million dollars laying around for legal fees and a year or two to dick around in court invalidating it.
USPTO demands thousands of dollars for a reexamination request for each of the thousands (tens of thousands?) of blatantly worthless patents they've issued in neglect of their mission. They don't even refund you for winning and thus having done their job for them competently.
What an utterly asinine response, as if a random HNer is going to force a reexamination.
However their point is, it seems, that once Apple tries to leverage this it will be forced into re-examinations. Apple has forfeited a number of patents when they've used them, a re-examination occurs, and most or all of the claims are tossed. This will likely be another of the same.
In some ways I think Apple is a bit naive in this: Microsoft tries its hardest not to actually go to the courts, and they'd rather extort with blanket patent threats, thereby keeping the actual stockpile somewhat safe. Apple just keeps blowing their patent load, losing a bunch in the process.
> There's enough prior art to demolish this easily. It won't even remotely hold up under legal scrutiny if it's ever used by Apple in a lawsuit. I think this is a complete non-issue.
It's just a summary dismissal, with no evidence whatsoever to back it up. My comment was tongue-in-cheek.
I find the China Study and Dr. Esselstyn's work to be far more interesting in regards to the results of a diet rich in the consumption of animal cholesterol and animal protein.
There are two big evils in American lifestyles: hyper consumption of sugar, and lack of exercise.
Americans walk a fraction as much as their grandparents every day, and consume several times more sugar. Worse, we consume insane quantities of high fructose corn syrup and its variants.
In the 1970s the US Government massively subsidized corn crops, which led to the creation of high fructose corn syrup. It's no coincidence our obesity epidemic really exploded from roughly then forward.
There's no reason you can't raise $250k for 25% from an angel investor, to build a $10 or $20 million business. That's a helluva result to put it mildly. You know, building an actual business that produces actual profits, not vaporware built-to-flip companies that produce nothing and only exist in a tiny corner of the economy.
The stock market hasn't moved in real terms in 13 years or so. Interest rates are on the floor. Any investor outside the big VC game would kill for a 10 or 20 fold return over 10 or 20 years. There's a beautiful thing called dividends, which a successful business can pay to its owners. Dixon doesn't seem to know anything about that however, as his assumed scenarios require the big exit and ignore any other possibilities.
If you take $250k, and you build a $10 or $20 million valuation business, it's not difficult to kick off a very nice dividend to the investor that provides a stellar return on their capital. AND if you ever choose to sell, said investor also gets their big exit as well. You can also buy their stock back at the higher valuation and they get their exit that way. These types of results are common in the real economy, but not so common in the fantasy dotcom economy.