[nostrademons]

There's a weird set of assumptions in this piece that make me a bit nervous about the state of the startup ecosystem.

When I was first getting into startups (late dot-com boom to about 2009), the assumption was that your startup was your identity, and an expression of your power to change the world. You owned it, or a big chunk of it, and you got rich by growing the size of the company (and hence your share value). This is the Warren Buffett, Jeff Bezos, Steve Jobs, Page & Brin, and Zuckerburg model. Control and ownership stake are the forms of "compensation" that matter here - instead of you taking compensation as CEO, you paid out compensation as owner of the firm, and slowly gave away equity in exchange for deals that would make the overall firm worth more. The article alludes to this model with "your entire life and self-worth is wrapped up in the company".

But the whole premise of this article doesn't exist with that model of a founder's role. Founders don't take compensation; they own the company, and dole it out based on who increases the value of the company most. Founders put their allies on the board, they don't take orders from the board. Founders wouldn't consider an outside CEO, so that comparison would be moot.

It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio. Which I've suspected we were getting close to for a while now, but if true, it makes the job description of "founder" a lot less attractive. If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?

[bluishgreen]

"For the last few months, I've been cautiously testing a radical-sounding hypothesis on smart people: entrepreneurs are the new labor. Or to put it in a more useful way, the balance of power between investors and entrepreneurs that marks the early, frontier days of a major technology wave (Moore's Law and the Internet in this case) has fallen apart. Investors have won, and their dealings with the entrepreneur class now look far more like the dealings between management and labor (with overtones of parent/child and teacher/student). Those who are attracted to true entrepreneurship are figuring out new ways to work around the traditional investor class. The investor class in turn is struggling to deal with the unpleasant consequences of an outright victory." (2012)

https://www.forbes.com/sites/venkateshrao/2012/09/03/entrepr...

[rogerkirkness]

My experience has been the opposite: investors are very smart late career people who defer, encourage and support. Compared to the "CEO fired for missing the quarter" days, it's very civilized, arguably strongly biases towards founders tbh.

[josh2600]

This mirrors my experience.

Strong investors now will literally assign their voting shares to the ceo and not take board seats even in a Series B round.

[tyre]

This couldn’t be further from the reality.

Valuations on early stage companies have never been higher—we’re talking eight figures for pre-revenue businesses—which means millions of dollars before hitting the ~20% equity for a round.

Founders sometimes have shares worth multiple votes, the board is entirely them (since the huge supply of money gives them leverage), and VCs are so afraid of being labeled “founder unfriendly” that they defer almost entirely to founders.

Whether it’s good or bad is a much longer thing (some of each, of course) but it’s certainly not founders working for investors. It’s never been less so.

[telotortium]

michaelochurch has pointed this out for a while now (at least since 2013 on his old blog).

[dustymcp]

i think alot of tech companies working with crypto can say this.

[jandrewrogers]

In my opinion, the relationship between founders and investors has changed with time. The role of “founder” has become much more of a structured profession, whereas it used to simply be a random person who started a tech company. In the modern version, I would argue that the role of the founder is to create high-performing investment vehicles for venture capital. This is explicitly understood by some founders and creates a different relationship with investors than “building a company” founders. Even though the activity is essentially identical, the perspectives and priorities are different because you are optimizing for slightly different things. Building companies is just a means to an end for investors.

The biggest implication is that the primary "customer" of the founder is different in these two versions of the role.

My experience is that founders who internalize that their role is to create and manage investment vehicles for venture capital have a different and higher leverage relationship with investors, including compensation, than founders that think their primary purpose is to build a company.

[m_ke]

The size of VC funds exploded in the past 3-4 years thanks to SoftBank. Raising 5 mil A round used to be a big deal, these days most seed rounds are around that and it's not hard to see A rounds in the 50mil range. It's much easier to cut yourself a larger check with so much money in the bank and it attracts a different type of crowd.

https://news.crunchbase.com/news/bigger-checks-days-to-close...

[PragmaticPulp]

> It makes me think that the "change the world" phase of tech startup history is over, and we're now in the "fill in the gaps" phase, where a "founder" is a hired gun that slots into a VC's portfolio.

I don’t think it’s over, but it has shifted into what was previously known as lifestyle businesses.

There isn’t much room left for “change the world” startups that have broad impact unless you come prepared with a massive war chest to outspend your competition. Most famous startups still have to buy their customers often through the IPO stage, which is why we still see companies like Uber or even Gitlab being cash flow negative when they go to market. If you’re not prepared to spend your way into the market, you’re unlikely to get very far (there are exceptions, but they are rare). So yes, this space is mostly a VC game.

However, I know of more small tech startups than ever before that are bootstrapped or have minimal investment. These small companies aren’t targeting highly competitive, broad markets like ride sharing or Git hosting. They’re playing into a founder’s personal passion or addressing unmet needs in their own domains. They won’t be the next unicorn but they’re producing good work and making a difference close to home.

In many ways it has never been easier to start a small startup. Working for a decade at a FAANG job or even a good tech job with an eye toward savings can give someone plenty of savings to coast for years while they start up. Tooling has never been more accessible for rapidly assembling prototypes and gathering customers. Even knowledge about starting companies and scaling software is freely available online.

> If you're going to be a hired gun, why not work for a FAANG and probably make a bunch more money?

One of my unpopular tech opinions is that “just get a FAANG job” isn’t as easy as it sounds. I know many smart people, including some who went on to become successful entrepreneurs, failed to get FAANG jobs after years of trying. I know several more who got FAANG jobs and then burned out or failed out. If money is your goal and you can get in then it’s a good option. It’s not the easy button, though.

[glitchc]

There's plenty of "change the world" opportunities left. How about a company that mines the ocean floor for minerals? What's completely full to the brim are tiny companies that are pretending to change the world but are really just thinly veiled ad-based/subscription models, which are half-hearted attempts in various sectors to replicate the success of Google and Amazon.

The world still needs companies that are actually looking to change it, we've barely scratched the surface on what we can do with what's available to us.

[danjac]

You're not going to mine the ocean from a garage or spare bedroom though.

[cl42]

Your observation is very interesting. Mark Suster's article ("The Changing Venture Landscape"[1]) also discusses how today's startups raise significantly more early funding and how this is changing the venture landscape -- more money chasing fewer deals, raising valuations, but also non-angel investors having certain expectations of their startups.

Taken together, do these observations imply a structural change to how venture and startups work?

When I was starting my first company in 2012, your point on identity rang true -- I tied my identity to the startup and so did our early employees. Now, many of the startup CEOs (and venture studios, angel funds, incubators, etc.) seem more like money managers and financial engineers.

...and I guess this might be why compensation expectations are changing.

Thanks for sharing your thought. I've been bothered by the way startups seem to work nowadays and I haven't been able to fully articulate why. The above is helping me clarify that.

EDIT: as I try and clarify my thinking here, it sometimes feels to me like many startups today feel more akin to private equity (PE) projects. In such a scenario, you'd expect founder compensation to change (as per the original link). It'a also in line with Suster's post + observations of hedge funds and PE shops funding more startups[2].

[1] https://bothsidesofthetable.com/the-changing-venture-landsca...

[2] https://pitchbook.com/news/articles/how-hedge-funds-are-lead...

[m_ke]

Yeah these days the best business model seems to be out raising the competition and using your cash to let you bleed long enough to gain a monopoly in your market.

Sadly this also works in favor of VCs, who get an excuse to raise 10-20x larger funds and live off of the management fees.

[ryanSrich]

This is less about founders not tying their startup to their identity, and more about the exponential growth of VCs and the power they wield over non-leveraged founders.

Take a first time founder for example.

You’ve been working on an idea for a while. You’re just now getting traction. You likely don’t make much, if anything at all. Either because you are pre revenue, or you’re putting everything back into the company.

Now, a VC comes by and says I’ll take 20% of your company in exchange for $2 million.

Another VC comes by and says I’ll take 20% for $2.5m.

And so on.

The founder now has a hard decision. Do you take the money, grow the company A LOT faster and be able to pay yourself a salary? Or, do you continue to grind away, hoping the business grows organically, which could take 10-20 years? Do you even have enough savings to wait that long? Are you killing the business by not taking the money?

Okay, so let’s say you take the money. If you’re a repeat founder you know what to do. Don’t do a priced round, or if you do, don’t create a board. If you do create a board ensure founders still have majority. Essentially put everything in place so you don’t get fucked. So the option for you to be replaced by a hired gun doesn’t even exist. This sounds reasonable right?

Well most first time founders don’t even know you have to do these things. Or even if they do know they still might have zero leverage and take the money anyway, knowing they’ve relinquished some control. Knowing they will likely be replaced in 3-5 years.

This is how VC works now. The leverage has shifted completely.

[GDC7]

> This is how VC works now. The leverage has shifted completely.

I don't think this is entirely true, as always it varies by VC. Each person is different.

Also VCs as a category know that they cannot bully founders and overplay their hand too much because if founders perceive that they are about to be diluted into irrelevancy or replaced they still have these little weapons called constructive dividend and constructive salary that they can "pay" themselves in so many various forms that VCs will be left wondering what the hell happened.

[echelon]

> Well most first time founders don’t even know you have to do these things. Or even if they do know they still might have zero leverage and take the money anyway, knowing they’ve relinquished some control.

As a founder, can't you just demand that you keep 51+% of voting shares? Or more, if you intend to sell at any point?

Or put poison pill clauses into the company founding docs with provisions if you're removed?

How can a VC force you out?

[rhizome]

The feeling I get is that founders aren't looking to the long-term anymore, either because they aren't confident of their ability to make it on their own or they're only working toward an acquisition. I assume the latter is the dominant mentality in undergrad/MBA/GSB subcultures. Cowardice vs. greed, I suppose.

[mikeryan]

There’s a third reason here. With the current size of a round a founder can become very wealthy by converting personal shares (ie cashing out) in each round. They can literally get F-you money regardless of the company’s outcome.

Look at Clubhouse. It reached Unicorn status while still at, essentially, Alpha. It would be silly for the founders not to take $20M home during those rounds right?

[equality_1138]

Are you suggesting that our universities are teaching short-term thinking cowardice and greed? Or is it just certain programs? For a while I thought it was "STEM" programs that alluded most to easy-money themes in academia, with business schools teaching more of the long view and social responsibility of financing then managing a business.

[bitexploder]

It does put you in a different club and give you a lot of credibility to successfully exit. You can replay the game on VC boards and other places and at a higher level. It is a small club and successful (e.g founders with a solid exit) just have more options. You can use a variety of skills to grow a business. You have to win the tech meritocracy in a FAANG and competition can be a lot more narrow.