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Why There Aren't More Googles

paulgraham.com

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Re: Why There Aren't More Googles

#131

Post by JamesMitchell »

As noted above, the VC firm Charles River has a seed fund that invests $250,000 per deal:

www.crv.com/AboutCRV/CRVQuickStartFAQ.html

This is a brilliant idea! Ycombinator has been a true innovator -- they saw a gap in the capital markets, they had the guts to go out and fill it, now a lot of guys are copying what they do, but they will always enjoy first mover advantage. Charles River is doing the same thing, filling a gap that everyone knows exists but no one so far has actually filled.

One of my reactions to the Ycombinator standard approach -- $15,000 for 3 months of funding -- is that 3 months is a very show time frame. I am pretty good at what I do, I frankly have a lot more experience than the kids who get Ycombinator funding, I typically work about 70 hours a week, and I know I am quite productive at what I do. I don't go for home runs but at the same time, I don't go for singles. I go for doubles, that is a risk/reward range I am comfortable with. I find it takes about 12 months to get it running reasonably well, and I have done it several times before. I would not want to work on a 3 month time schedule. If I did, I would be going for singles and singles just are not that interesting.

To me, a single is a deal where you end up with $1 million cash out after two years. A double is $5 million after two or three years. A triple would be north of $10 million, no later than four years. Anything north of $25 million is a home run. Anything above $100 is a grand slam home run.

I do not need financing, I just fund them myself, but if I did, the Charles River deal would be much more appealing. Assuming I needed the money, with $250,000, I could get two partners, we each pay ourselves $60,000 a year, perhaps burn up another $50,000 in expenses in one year, for a total burn of $230,000,leaving us $20,000 margin (admittedly, not a lot). But in one year with two really good partners, we could do a hell of a lot of work, perhaps a triple rather than a double.

I really like what Ycombinator is doing but so many of their investments seems unambitious -- two smart college students who whipped something up in a month. Perhaps they might build a company from that, but in some cases, I am skeptical.

James Mitchell jmitchell@kensingtonllc.com

Re: Why There Aren't More Googles

#132

Post by oraboy »

The challenge with the $200k-$500k funding gap is the fact that most VCs make funding decisions by partner consensus.

After spending the last 8 month trying to put such a round together, and going through the process with quite a few VCs, It's apparent that this brings 'boldness' way down because all the lead partners need to develop the intuition necessary to be bold-- on what is essentially a hypothesis on market development or consumer demand in a field that is usually not their individual core expertise and in the short time frame that this business allows nowadays. doesn't happen often.

This is why these sort of investments are made by small/ partner-lean funds or through the "strong" partner in a more traditional firm... and there aren't enough of those.

It's not that they don't want to make those sort of investments, its that they're not setup to do so. In our discussions, we've gotten to, at several occasions, a point where our sponsor partner is actively trying to get the deal done, only to fall apart because of this need for uniform consensus of the entire clan.

If I were a VC, I'd focus on streamlining that process through more partner independence as I agree that this is the sort of funding a truely innovative (particularly web software) company needs to establish itself these days and they are mostly missing out...

Re: Why There Aren't More Googles

#133

Post by yters »

Xichekolas wrote: post #119
brlewis wrote: post #107

Earlier quoted context omitted.

Probably not. I turned 40 last month. I find that I'm much less likely to write the wrong year on my checks than I was 10 years ago. When you're younger, what year it is seems permanent, hard to change. Later you're no more likely to forget what year it is than you are to forget what month it is.

Heck, I'm only 24 and I was just noticing that the other day. I remember when I was in second grade, and the year switched, I put the wrong year for months. Now the turning of a year just doesn't seem that momentous anymore. I wonder why time seems to accelerate as we age. Is it because we are more busy, and hence spend less time being bored? Or is it somehow related to the fact that any given year's memories are an…

I think it's largely the latter. When you have fewer memories, everything is newer, so each moment is more vivid. As time seems to slow when we have adrenaline rushes, the same with vivid experiences.

Re: Why There Aren't More Googles

#134

Post by paul »

pg wrote: post #79
paul wrote: post #75

Earlier quoted context omitted.

Google will be obsolete once the semantic web arrives ;) I remember being pretty skeptical of Google. Better search seemed like a nice idea, but it wasn't clear how they were going to compete with the established players who all had more money, more users, more engineers, more features, etc. Also, Google wasn't the only company trying to build a better search engine. It seemed like there was a new one every month.

If once = iff, that's the most optimistic assessment of Google I've ever read.

:)

Semantic web jokes are the best..

Re: Why There Aren't More Googles

#135

Post by paul »

aswanson wrote: post #104
paul wrote: post #75

Earlier quoted context omitted.

Google will be obsolete once the semantic web arrives ;) I remember being pretty skeptical of Google. Better search seemed like a nice idea, but it wasn't clear how they were going to compete with the established players who all had more money, more users, more engineers, more features, etc. Also, Google wasn't the only company trying to build a better search engine. It seemed like there was a new one every month.

How did you bump into Google, coming from the middle of the country? What made you get over the initial skepticism and join? (If you don't mind me asking.)

I was working at Intel in Santa Clara. As for skepticism, I'm always skeptical, but I liked the people and product, so...

Re: Why There Aren't More Googles

#136

Post by datalyst »

I agree. I recently presented at a local angel and VC conference. Many people believed in our idea, but we were asking for $500K. I already had a high profile company who had already signed an agreement to conduct a trial with us. The $500K was to be used for the trial as well as marketing. I got the same comments about traction, looking for later stage companies. At this point, I would rather take a loan out from a bank or arrange some creative funding than go to a VC again.

I think sometimes it really comes down to guts. We can all site and do the risk analysis on a good or bad investment, but a gut call has to be made in the end. I think for one reason or another most VC's have lost the mindset. It may also be the change in the environment. The dot bomb may have left serious psychological impediments that most VCs do not want to relive so they shy away from these investments even though it can provide sensational returns.

Re: Why There Aren't More Googles

#137

Post by wright »

pg wrote: post #46
muerdeme wrote: post #41

Instead of making one $2 million investment, make five $400k investments... If you're investing at a tenth the valuation, you only have to be a tenth as sure. I don't agree with this. The investors have to be just as sure of the risk involved in each valuation as before in order to have the same expected value for the overall portfolio. However, investing $400K in 5 companies instead of $2M in a single company will r…

Suppose your threshold for investing in a startup is an n% confidence that they'll one day have a market cap of a billion dollars. Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company? You have the same percentage in all these companies that you would have had in the case of a single, big invest…

> Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company?

You'd have to be more confident in aggregate.

Let's say in the former case you have a 50% certainty with one company; and in the latter case you have 5% confidence with each of 10 companies.

The chance that NONE of them succeed to that degree is 0.95^10, or about 60%. So only a 40% chance someone will make it, vs. 50% for the former.

With smaller probabilities the difference is less, but guesstimating at billions is such a crapshoot. How about something more realistic?

How about doubling your money: Let's say you put $1 mil into the former company. If it doubles its worth, you've doubled your money. But in the $100k for each of 10 companies case, they all have to double their worth, or one has to grow 20x.

Let's say you think it's a 50% safe bet in the former case, but a whopping 90% chance in the smaller cases. The chance they ALL double up is 0.90^10, or about 35%. So you're probably losing money.

Sure, some might do 3x or 4x to make up for a couple of the flops, but you probably aren't going to let a 100k investment just die; you'll be sinking more into the money losers, so the successes have to do even better to make up for the bailouts.

Re: Why There Aren't More Googles

#138

Post by sonicsrini »

TOTALLY TIMELY. thank you for this.

it's like rock bands that sell out to major labels for big advances and then sell like 10,000 records and wind up owing the label. and you know the LABEL ruined the band.

good web startups aren't about money, they're about building something new. as fugazi puts it, "when we have nothing left to give there'll be no reason for us to live". basically, google was JUST GETTING STARTED and they KNEW it - they were following a brilliant brand into the infinite sun with no knowledge of how they'd milk it until all of a sudden the answer popped into their (well Bill Gross's) head.

so selling out means you're done developing the product. that is cool if you go design something else, but generally, the product winds up being dead on the vine. big companies buy small companies to scare and posture at other big companies and grab a few headlines.

in order to get acquired, you've got to have a "hit". some bands are one hit wonders. these bands like to work with major labels, which is OK if it makes the radio a bit cooler that summer (cf Cracker). but the major labels buried the Gang of Four, just as surely as they'd snip Twitter's in-house innovation capacity in the bud. That said, if the Twitter guys are "done" with innovating, good for them, go ahead and exit! but i hardly believe Twitter is done developing their product. therefore, NO SALE, and the chance for Twitter to unleash a bidding war for a tiny sliver of equity such as what was engineered by Facebook.

- Srini Kumar MetaNotes.com

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