This is a historically bad signal for market health but it's not all bad for hackers. More piranhas to watch out for but also more bizdev hustlers willing to help sell and/or raise money.
Edit:
I've personally been taken advantage of by an Ivy B-schooler so the piranha thing is real. It was the typical thing you hear where I, an undergrad, had written a bunch of code with a verbal contract from the MBA student that I'd own 10-20% of the business. After a few weeks, when paperwork was being filed, I was informed that I'd get more like 1% to be the first engineer and finish building the MVP. It's not that MBAs are bad but a lot of the ones I've known have been indoctrinated into this way of thinking of creative people as resources to be harvested. It's not evil, it's approaching business like a game, knowing all the rules, and playing to win. It does look and feel evil when the rules are used against you before you know you're playing.
The MBA student you're speaking of wasn't nearly as shrewd as you make him or her out to be. If you are the sole author of the code in question, as a general rule, the intellectual property rights associated it inured to your benefit the minute you created the code. Absent a written agreement containing a work-for-hire and/or assignment clause (for good measure, it's common to see both), your piranha may have no teeth as far as asserting ownership over what you created.
As for your comment about "rules are used against you before you know you're playing": regardless of role (technical, non-technical, etc.), everyone in this industry should educate himself or herself on the basics of IP and contract law, as well as the relevant areas of finance and tax. There are a ton of free high-quality resources online, so there's really no excuse not to get up to speed.
The really good news is that in most cases, the shysters you're likely to encounter are not much more knowledgeable than the people they prey on, so a little bit of knowledge can offer a lot of protection.
It's not just that creative resources are harvested but they are harvested by board members using way too much fertilizer and then flash ripened in warehouses using methane gas. The product is shit, ends up mostly wasted, and leads to a monoculture that will feed only a select few in perpetuity.
To my understanding, being an early employee is the best deal because they still get substantial equity, but don't face nearly the same level of risk as the founders.
Somebody did the numbers on HN a while back and showed that you have a higher probability of making it rich by being an early employee than by founding your own startup. I'm afraid I have no idea how to find that thread, though.
FWIW, the salary charts on angel list show the average startup equity offers there going for a bit more than a point.
If your hypothetical startup sold for $100 million dollars, after dilution and taxes, you could expect maybe $500k. In other words, ~$125k extra for each year of a 4 year vesting period.
That's nice, but it's certainly not substantial - it's about equal to the salary you'ld expect at the same jobs. And, we are talking about a hundred million dollar, moonshot exit - in other words, vastly, vastly more than most startups can expect to make. Most early employees make a modest, very decent, pittance.
a higher probability of making it rich by being an early employee than by founding your own startup
There are an order of magnitude more early employees than there are founders, so it makes sense...for every founder made rich, there are 10x as many early employees made rich.
Substantial, not really. After a year or two, the salary you give up in return for equity will probably be more than the founder's initial stake, yet you will get 1% of 1% of any upside.
Then why would anybody start a company? why not just join as #12, once a ton of work has been done and you can anticipate, relative to when it was just an idea, the path of the company.
We're speaking about expected values here. The expected value of joining a slightly de-risked startup as an early employee -- provided you don't get entirely screwed on equity, which is certainly a nontrivial risk -- is higher than the expected value of founding your own startup at T=0. This has a lot to do with things like risk, salary/equity mix, and the probability that your startup will actually succeed.
Of course, the absolute value of a big win, should a win come along, is higher for the founder than for the early employee. But the early employee has more flexibility, and probably takes more swings at bat over the course of a given time period. He won't hit a homerun, but he may hit a series of doubles. The founder might hit a home run, or he might strike out.
And on an unrelated note, the expected value of a stable job at a place like Google or Facebook is probably a lot higher than the expected value for either a startup founder or startup employee. This doesn't mean everyone should go BigCo and not mess around with startups. It just means people should figure out their personal risk-tolerance levels and ambitions, and act accordingly.
I wouldn't call it a bad deal as much as a reality check. If you are expecting fuck-you levels of equity as early stage employee, the vast majority of startup job openings will disappoint: IMHO, this says more about people's unrealistic expectations than the fairness of startup shares.
The amount of money and media attention around "startup" is eventually going to lead it to its downfall. There is no quick "make money fast" schemes in life. The reputation that the tech sector has created after the dot-com era was created purely on sweat and hardwork ( not mine but the veteran engineers in SV whose shoulders I am standing on). Now the vultures seems to back and many tech products on the markets seems to have a over-inflated valuation because of this dumb hype.
I am keeping my options open since I know this is going to lead to a crash in the next few year.
From what I've read, towards the very end of the last crash - a measurable number of "ivy" league school MBA's were leaving their mgmt consulting, investment banking offers to pursue startups. I believe when the most risk adverse, conformist, security of self focused individuals (which tend to seek MBAs) pursue startups - it is an indicator of the peak.
Peter Thiel had a few good things to say about this in Zero to One along the lines of what you wrote.
Perhaps it isn't so helpful to generalize here but,
a) New businesses that are built for non-digital processes and workflows are very inefficient. Not every new small business is going to gain a decisive strategic advantage in their market. Almost none will. That doesn't mean we shouldn't be teaching students business (value of the MBA another conversation.)
b) I'm not a VC but the returns for startups is something along the lines of lose 100% of the money, may be return the investor's capital, or post a great return. All the mechanics underlying what it takes to make it to 'great return' by itself limit the number of big winners. This isn't investing in apartment buildings, creating a new food franchise, or arbitraging bonds. Most likely the "me too" trend riders will end up in the lose 100% of the money box. That is unless we get leveraged start up investing. Then it could get quite interesting.
I like Nassim Taleb's extremistan analogy for this conversation.
So how does this market crash? This is something I have struggled with for some time. Markets have typically crashed because public investors buy at very high prices and then the market loses faith that the future cash flows of the business will pan out. But IPOs aren't happening like they were. Facebook buying Instagram for $! billion is crazy, but Facebook continues to grow and generate revenue (because of or in spite of Instagram) to exceed investor expectations. If these acquiring companies continue to grow and succeed, then how does the bubble collapse? We have no idea whether Nest can justify the $3.2 billion Google paid for it, we just know that Google continues to beat estimates and the Nest guys continue to afford nice cars.
I also do take exception to the fact that MBAs are all vultures. I am trained as a computer Engineer, practiced as a materials scientist, and got an MBA. Now I am one of those exact vultures you speak of with a startup of my own that I, by the way, believe is going to contribute meaningfully to society.
Evan Spiegel's view of everything got leaked with the Sony Hack. Take it for what its worth:
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets - at these values, however, all tech stocks are expensive - even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won't be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars -- largely due to mobile advertising performance - especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users - a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. "If this company attracts just 5% of users that FB has, it will be HUGE" - fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease - compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.
Interests rates rise, investors pull out of riskier assets, like tech/VC. Funding dries up, businesses start to fail, causing further investor pull back, which in turn causes more businesses to fail.
>If these acquiring companies continue to grow and succeed, then how does the bubble collapse?
Simple: the bubble collapses when the acquiring companies no longer grow and succeed.
Facebook et al are doing well, but also have sky-high valuations. Current investors aren't satisfied with current income, they expect massive growth going forward.
If current investors weren't satisfied with current income, they would sell. Facebook's margins are excellent, and while I will agree their P/E ratio is high, Google's is quite near that of GE (which should have a much lower multiple considering their return on assets is MUCH lower). I'm sure it will happen eventually, but tech companies are making money right now, and they aren't built on broken economics like the dot com bust in 99.
I guess while I agree there is a bubble in startup valuations, I do not think Google, FB, and friends are at huge risk of going bankrupt or losing a substantial portion of their enterprise values.
If current investors weren't satisfied with current income, they would sell.
The market is not about current, but about the future. Stockholders are banking on FB figuring out how to monetize all the users.
I do agree with you that companies today are mostly all making money which is very different from the 90s. Whether companies like FB can maintain growth to sustain their valuations is something that remains to be seen.
It feels a bit bubbly but a lot of the risk has shifted to the startup. It's a lot easier to get the small funds to start but harder to get the big bucks. The valuations make sense if you think about talent costs, customer acquisition costs, and that the deals often include a lot of stock.
Most companies are sweat and hard work without a doubt. That said there are occasional stories, Groupme comes to mind, where you build a product, work hard on it for a year or so and get bought out by a bigger company with no serious plans for your product. Then you just ride out the golden handcuff period and collect your cash. By no means should anyone expect starting a company to be that sort of experience but it happens and some people believe they can be that company.
Ok, I am about ready to call it a 'bubble' :-) One of the things which became apparent about 1998 was that people who were interested in the "business" of technology were arriving in numbers to make all the right motions, say the right words, and get money to rain from the skies. Not that they had a product or solved a problem, but the incantation was good. I am always perplexed by people whose target is essentially simply a score.
I suspect that a bubble is preferably defined by investor behavior, not worker behavior, even if the workers call themselves "founders" or "entrepreneurs."
That is true, and it needs wide participation, but my observation from the last time was that "business people" who need an audience for their incantations solicit the necessary investors.
I am entirely unclear if the last bubble was caused by retail investors unilaterally deciding to "invest in tech" because they thought they would get rich, or caused by persuasive people asking folks who didn't know any better to invest in them with the promise of riches.
But I have observed (at least one time, and past performance is no predictor Etc.) that when folks in business school, or fresh out of there, say they are going to do "startups" and they describe them not by their risk, their approach, or problems uniquely suited to them, rather they use a bunch of meta terms like "agile" and "MVP" and "social" and "sharing economy", they have lost sight of the notion of creating value, and shifted into the mode of "executing a process that seems to return more money than you put into it."
This sounds pretty healthy. I can't imagine anything we'd really prefer to see MBAs do, after all. Go be investment analysts or work at a hedge fund? Doesn't do much for the world. Go be a highly paid grunt in the finance arm of a corporation? Write business analyses? uh...
Go take a risk on introducing a new product into the world? Check. Sounds like "business" to me. This is a great trend, hope it continues!
Challenges to this change sticking long term - starting a boot company puts you on even footing with any other person who wants to do the same. The reason we decry "MBA" is the reason people earn them in the first place - they function like a $120k entry fee into a protected job class - like being an analyst as mentioned above. Using the degree to enter a business without protections is risky.
That said - to the extent that the university morphs into an incubator to make sure their students are successful - this will give their students an advantage. The MBA would then be weighed against dozens of other incubator type opportunities, or just going and doing it alone.
A lot of startups completely fail but that's not interesting, "<a startup you never heard of> has failed" won't get many clicks on TechCrunch.
People share stories about how they 'failed' (got great job offer afterwards, etc) and managed to come out with plenty of cash. But there are a lot of people who get burned. They simply don't make headlines, no one is interested in those stories except from small circles such as HN.
Startup is not a quick, and fail-proof way to get rich as mass media portrays it to the public.
Some people will end up seriously disappointed but real businesses will continue moving forward.
I realize MBAs have a bad rap (disclaimer, I'm getting my MBA), but I think they can bring a lot of variety to the start-up scene. The MBA class is chock full of students from almost every industry who know very well the problems these respective industries face. Furthermore MBAs approach problems through different lenses that may be more sensitive to firm strategy, finance, operations, accounting, etc. These approaches may uncover new insights into the business or market.
@Dwollb I'm also getting my MBA, and agree with you. There is a propensity for MBAs to get a bad rap in this community. I came into my program (Kellogg) with a tech background, and I know it has radically changed how I approach problem solving and other tasks.
A lot of people here seem to think this is the "end of start-ups" or that this is a leading indicator for a bubble burst.
I fail to see how that would be the case as there is no reason that a specific group of market entrants would crash a business model. I think if anything, it will be a wake-up call to people who think that "start-ups" are a get rich quick scheme.
The only way for this to turn out badly is if somehow this group sucks all of the angel/vc money out of the "start-up" ecosystem and into their own pockets.
As someone currently getting their MBA (and coming from a tech background, been coding since I was 14), I feel that this is a good sign. I would much rather see MBAs try to create new value rather than get sucked back into the vicious cycle of investment banking or management consulting. Startups can offer people of all types the chance to have impact in a positive way. I see lots of startups fail because the founders don't understand basic business concepts and practices, so if some business savvy is injected into this market, great.
I wonder how they're going to repay their MBA tuition. Typically a tenure in consulting or high finance would pay for this. Perhaps some don't have this burden, but for many I assume tuition is paid in large part via student debt.
Are they planning to pay themselves large salaries from the get-go? Quite a culture to start a business on...
Unlike engineering degrees that no wealthy person would suffer through, MBA's are sometimes obtained by people from wealthy families or who are wealthy themselves. Not everyone starting a business is starting from zero either. Think Winklevoss twins who both did MBA's and are doing startups.
Wealthy as in never have to work again wealthy, i.e. greater than $10 million personal net worth? If so I'd like to meet some of those people. The thing about research oriented degrees is that for the last few centuries wealthy people studied those things for status reasons. They were part of royal societies and the more time spent making esoteric discoveries, the more they displayed wealth and leisure. Engineering, though, is usually about applying things that are already known. So if there is someone who is set for life that has gone through an engineering program then they are not doing it for wealth, sustenance, or status. They must really like engineering.
I remember Paul Graham once saying that 9 out of 10 startups fail, but it seems that nowadays outright failure is less and less common. Sure, only a fraction of startups get really big, but it seems like acquihires are becoming the default failure mode. With the upside of striking it rich and the downside of employment at another company with a generous signing bonus, it's no wonder lots of people want to hop on board the gravy train.
That's all a quick google image search could find: I've seen the 2014 data, it's more of the same - the deals remains flatlined while the number of ventures starts to go parabolic.
I highly doubt that most ventures that can't make Series A are going have that many opportunities for acquihire.
Do you really think that acquihires are becoming the default failure mode? What about all of the startups that fail silently? I'm seeing some selection bias here.
I don't know, but what actually happens is immaterial. All that matters is perception, and my perception (selection bias and all) is that starting or being involved in a startup seems much less risky than it did 5 or 10 years ago. I'm sure that there are lots of people at Harvard, Wharton, and Columbia that share this perception, leading to an increase in demand for programs about startups.
1. Most people don't go to HSW (Harvard, Stanford, and Wharton) to start startups. Well, for some edge cases, it is a way to get admitted. Many of the grads here love to get hired by PEs like KKR and Blackstone.
2. Business schools are good at marketing themselves: they try to set up labs for new trends, fads, etc.
This reminds me of the speech Peter Thiel gave about how MBA flocking to a sector is a good early bubble indicator. The reason is that MBA don't give a crap about an industry until it is at peak. Then shortly the bubble almost certainly bursts . Examples he mentioned, junk bonds, dot com, subprime and now startups...
Edit: I've personally been taken advantage of by an Ivy B-schooler so the piranha thing is real. It was the typical thing you hear where I, an undergrad, had written a bunch of code with a verbal contract from the MBA student that I'd own 10-20% of the business. After a few weeks, when paperwork was being filed, I was informed that I'd get more like 1% to be the first engineer and finish building the MVP. It's not that MBAs are bad but a lot of the ones I've known have been indoctrinated into this way of thinking of creative people as resources to be harvested. It's not evil, it's approaching business like a game, knowing all the rules, and playing to win. It does look and feel evil when the rules are used against you before you know you're playing.