As transaction costs go down (in general), it makes less sense for us as a society to have production/value creation organized in larger organizations (firms, companies, etc) - instead in a bunch of independent smaller groups.
Companies only exist to minimize transaction costs.
Companies only exist to minimize transaction costs.
I think this is a bit of an overstatement. Another purpose of companies is to provide the benefits of a command economy (e.g., the ability of a great leader to jump from a local to global maxima) with less of the dangers of a command economy (great leader robs/kills you, poor planning screws everyone over).
E.g., central planning in the food supply can work reasonably well, but this is hardly guaranteed. Market discipline gives us the benefits of McDonald's 5 year plan, but a McBankruptcy rather than Soviet Union style food shortages if the 5 year plan fails.
Thanks for sharing this...although while reading this I also chanced upon "The Wealth of Networks: How Social Production Transforms Markets and Freedom"...which explains why I find working with random people on github more enjoyable and productive than with people from my organization.
Each day, I thank god for all these useful idiots in SV. They're madly running a rat race to build the next social widget. Throwing off useful technology I can use to serve the vast wasteland ignored by them.
Thinking in the most simplistic form possible - how about engineers just doing what makes them the most happy? Forget about whether we could provide more value at an established company. Maybe building our own products is our passion. That alone will drive more value than doing something we're not passionate about. Just a thought.
Whether early stage startups are overvalued is a different topic to be discussed.
At Startup School, the Sequoia guy showed a bunch of slides which had two main points highlighted:
- Companies like Microsoft, Google, Yahoo, LinkedIn raised very modest amounts of funding and has multi-billion dollar IPOs
- Cost of creating a company (and associated technology) is down over 90% from what it was back when a lot of these companies were started.
Given these two, it's amazing to see VCs pouring in millions into startups that have nowhere near the valuation they invest at. Color is the most famous example, but there are tons of other startups raising $2-5M at pretty ridiculous valuations. If you consider that in light what Sean Parker says, regardless of his vested interest in engineering talent going to companies he's backed, it feel like what he's saying makes sense. Companies are ridiculously over funded, and VCs are doing a disservice to their investors as well as to their portfolio companies by giving more money than they need.
Valuations are set by the current value of the company and the projected outcome. Lower costs to launch and iterate actually increase the likelihood of success, as well as mean that net margins can be higher than if you had to invest in significant infrastructure. The fact that you don't need very much money and will be able to try all kinds of things on a shoestring budget is exactly why valuations are so high. Since VCs still want the traditional 20-40% of companies, they give them more money than they need out of their own desire to take a big stake - not because the valuation is out of whack.
Said another way, the less a company needs your money, the more you have to pay to get in.
>Companies are ridiculously over funded, and VCs are doing a disservice to their investors as well as to their portfolio companies by giving more money than they need.
No they're not. They're following the market. If they were doing a disservice to their investors, do you think the investors would just sit back and lose millions?
>Cost of creating a company (and associated technology) is down over 90% from what it was back when a lot of these companies were started.
The costs in terms of equipment and developer talent may be smaller than they were in the mid-late 90s, but the market is much more crowded now. I don't know that those savings aren't offset by the required marketing and PR efforts necessary to differentiate your company from all of its other "social web 2.0 tweet-a-riffic" competitors.
My theory is that 500 2 person companies have a worse chance at making a real splash than if the 100 best ideas from that group had 10 good people working on them. That's part of what he's saying - it's harder now for good startups to grow when everyone wants to and is incentivized to make their own web startup.
The other part he's saying is that people can have a larger marginal impact on the world working at a place like Facebook than they could in their own startup. For the median case, this is true.
> My theory is that 500 2 person companies have a worse chance at making a real splash than if the 100 best ideas from that group had 10 good people working on them.
I wonder if there is an opportunity for matchmaker investors to scoop up like-minded startups and consolidate early companies to build those 100 10-person winners.
Yes, he's right, but let's put this in context. There are probably a lot of talented engineers who are doing startups now who shouldn't be. The problem is how do we know who is going to be a good entrepreneur and who is not? We don't. The only way we know is by doing it, which is what a lot of talent is doing. I think many startup founders are a bit grounded in reality and know that they face real possibilities of failure. Just as long as they keep this in mind and don't become obsessed with caviar dreams, then I see no harm done. Being an entrepreneur is one way for an engineer to develop non-technical skillsets and learn something about himself in the process.
Let's not forget that this entrepreneurial activity is forcing the big guys (Google, FB, etc) to be more innovative than they would otherwise be - either to attract talent or to compete with startups.
I was at an event in NYC several months back where a mid-stage VC said the same thing (blanking on his name) but specifically regarding the NYC community. It was an angle I hadn't thought about and initially had the same negative reaction to as someone in the midst of an early stage company.
For later round investors it's undoubtedly in their interest to encourage these engineers to join larger firms rather than being on their own. In NYC it's especially competitive given the competition between more mature companies, early stage startups and the money wielding finance industry. The combination could lead to a 'glass ceiling' of sorts for larger companies because of the inability to attract talent; that is, until some of the smaller companies fail and these individual engineers likely end up at a larger spot.
It mirrors the consolidation of an industry. It just takes longer than some investors (like Parker) would prefer, which is the inspiration for statements like this.
Or the market price of talent goes up : The value being created by engineers is recognized by the financial institutions, so why shouldn't tech companies pay up too?
[ And I'm thinking Facebook before people get on my case about financial companies creating value in the real world... ]
What Sean left out was -- overfunded for whom? He implied it, but didn't say it: the bigger dogs in the fight (Facebook/Twitter/Google) have to compete for talent like everyone else.
The overfunding is mostly a problem for those larger tech companies, not the little guys.
I suspect he means that investors are overvaluing small startups (relative to their chances of becoming successful). The consequence he worries about is that having too much funding available makes the opportunity too appealing to the best engineers, making it harder for ventures that will succeed to keep/attract talent.
So I wonder if Sean Parker actually believes this, or if he is just frustrated by a lack of engineers available for his larger backed companies. Either way he doesn't look great making comments like this.
Running a small but ambitious company forces a serious, motivated founder to think about every business function. I don't see any meaningful downside for the founders who choose to spend some time on this task, and I see a lot of upside.
Parker's complaints strike me as absurd. If he really believes they can have more impact at FaceBook, he should find a way to create special purpose vehicles within FB that allow founders to get equity in the work of a small team, rather than just getting .00005% of the sum of FaceBook.
I think what happens is the price of an engineer has gone up. Engineer starts a start-up, big company buys start-up at a million per Engineer - Everybody happy.
He paints a picture of “Google pretending to be Switzerland, but doing back deals with everyone, and Apple being left alone to build the Deathstar.”Guess where that will leave most startups.
Nice analogy. Time to move to Dantooine and work on my X-wing startup.
Dude, are you sure you want to do that? I've got this buddy that's got this crazy thing going on on some gas giant. They're way past angel stage, they've got catered meals every day, a band practice room, a fooz ball table, and a carbonite freezing chamber.
It is better to be the head of a mouse than the tail of a lion.
All good things in life comes from collaboration with others as much as individual contributions, but there is nothing that says that collaboration has to be imposed by a external force, like with a company. The world has ruled before with open collaboration like science, and what we call "open source", "open hardware" today.
BTW, if I could do anything to destroy the vision that all the world is going to be controlled by oligopoly juggernauts and bureaucracies, I will, including creating new companies or helping young people to renew the landscape, as facebook or Google did(when companies success in a free market, next they want to destroy it).
If you think an engineer or product designer is better incentivized to do their own thing and you want to hire them away to BigCorp, you need to change your compensation offerings.
"The problem in his view is that many of the talented engineers and product designers who are now starting their own companies could have a bigger impact at places like Facebook..."
- says Sean Parker, the guy who owns between 2 and 7% of Facebook. Well yes, of course.
Pretty sure it's not a coincidence that Mark Zuckerberg emphasized a related message at Startup School ("don't start a company unless you're really, really passionate about it"). Facebook, like every other tech company in the valley, is having trouble hiring enough engineers, and this is a campaign to make would-be founders think twice.
I think they're very different messages. Sean Parker's message comes off as more self-serving - saying don't start a company because it's not as good for the world as joining one that can effect change to a greater degree. Zuckerberg's comment was about not starting a company for the sake of it, the same message PG had and a very good one. Start a company because they're the most efficient vehicle to solve a problem you care about. Don't fabricate some problem that doesn't exist because you want to start a company.
I don't think he is completely wrong but I think this is just another (higher-end) instance of the age-old tradition of companies saying it is too difficult to find engineers while being unwilling to pay fair value for said engineers.
To be clear, I know that Facebook does pay quite well by industry standards (offset somewhat by the bay area cost of living) for top talent, but if this situation is causing them an issue then what they are paying (or offering in general -- money isn't always the only thing) still isn't enough.
There's a certain type of personality (very prevalent in the valley) who won't work for a big company like facebook, twitter, or google for any amount of money. I would imagine these types of people make up the majority of the YC class.
Maybe they'll get bought via a talent acquisition but as soon as their golden handcuffs are off, they are out doing their own thing again. The reason they allow themselves to get bought via talent acquisition is to be able to easily raise money in the future.
I think Sean Parker is reacting to these types of people. I think the misconception is that the increased funding sources is what is driving these people. I would suggest that they were always there, but 5 years ago they were just living poor and working their ass off to build a startup (usually unsuccessfully).
I do believe I'm part of this group. There's no amount of money that would compel me to take a corporate job. Sometimes money isn't what matters.
This is a much bigger problem than many people realize; Ryan Avent discusses it in his ebook The Gated City (http://www.amazon.com/Gated-City-Kindle-Single-ebook/dp/B005...) and on this Econtalk podcast: http://www.econtalk.org/archives/2011/10/avent_on_cities.htm... . Basically, housing costs in Silicon Valley are eating up all the salary increases tech companies are offering. Avent describes how, in the 1990s when the unemployment rate in the Valley was effectively zero and lots of people who'd read "Learn HTML in 24 Hours" were getting jobs, people still weren't flocking to the area because the cost of housing is so high.
Anyone who wants to address extremely high tech salaries needs to be very interested in housing and urban policy.
You seem to be adopting the point of view that whatever pay is required to attract an engineer is the right pay. But what about when that pay eclipses the engineer's marginal value-add to the company? I think it not unreasonable to speak up if you feel there is a short-sighted market force overvaluing a resource.
Imagine you are a farmer, and the value of grain falls below the cost to produce it. Do you accept what The Market has decided, and continue growing grain for a loss?
[+] [-] PabloOsinaga|14 years ago|reply
A good read: http://en.wikipedia.org/wiki/Theory_of_the_firm
As transaction costs go down (in general), it makes less sense for us as a society to have production/value creation organized in larger organizations (firms, companies, etc) - instead in a bunch of independent smaller groups.
Companies only exist to minimize transaction costs.
[+] [-] yummyfajitas|14 years ago|reply
I think this is a bit of an overstatement. Another purpose of companies is to provide the benefits of a command economy (e.g., the ability of a great leader to jump from a local to global maxima) with less of the dangers of a command economy (great leader robs/kills you, poor planning screws everyone over).
E.g., central planning in the food supply can work reasonably well, but this is hardly guaranteed. Market discipline gives us the benefits of McDonald's 5 year plan, but a McBankruptcy rather than Soviet Union style food shortages if the 5 year plan fails.
[+] [-] radagaisus|14 years ago|reply
[+] [-] freemarketteddy|14 years ago|reply
http://www.benkler.org/wonchapters.html
[+] [-] spitfire|14 years ago|reply
Thank you Sean Parker.
[+] [-] allantyoung|14 years ago|reply
[+] [-] MatthewB|14 years ago|reply
Whether early stage startups are overvalued is a different topic to be discussed.
[+] [-] orblivion|14 years ago|reply
[+] [-] psychotik|14 years ago|reply
- Companies like Microsoft, Google, Yahoo, LinkedIn raised very modest amounts of funding and has multi-billion dollar IPOs
- Cost of creating a company (and associated technology) is down over 90% from what it was back when a lot of these companies were started.
Given these two, it's amazing to see VCs pouring in millions into startups that have nowhere near the valuation they invest at. Color is the most famous example, but there are tons of other startups raising $2-5M at pretty ridiculous valuations. If you consider that in light what Sean Parker says, regardless of his vested interest in engineering talent going to companies he's backed, it feel like what he's saying makes sense. Companies are ridiculously over funded, and VCs are doing a disservice to their investors as well as to their portfolio companies by giving more money than they need.
[+] [-] earbitscom|14 years ago|reply
Said another way, the less a company needs your money, the more you have to pay to get in.
[+] [-] jbjohns|14 years ago|reply
No they're not. They're following the market. If they were doing a disservice to their investors, do you think the investors would just sit back and lose millions?
[+] [-] cookiecaper|14 years ago|reply
The costs in terms of equipment and developer talent may be smaller than they were in the mid-late 90s, but the market is much more crowded now. I don't know that those savings aren't offset by the required marketing and PR efforts necessary to differentiate your company from all of its other "social web 2.0 tweet-a-riffic" competitors.
[+] [-] ericd|14 years ago|reply
My theory is that 500 2 person companies have a worse chance at making a real splash than if the 100 best ideas from that group had 10 good people working on them. That's part of what he's saying - it's harder now for good startups to grow when everyone wants to and is incentivized to make their own web startup.
The other part he's saying is that people can have a larger marginal impact on the world working at a place like Facebook than they could in their own startup. For the median case, this is true.
[+] [-] a3camero|14 years ago|reply
[+] [-] cpeterso|14 years ago|reply
I wonder if there is an opportunity for matchmaker investors to scoop up like-minded startups and consolidate early companies to build those 100 10-person winners.
[+] [-] AznHisoka|14 years ago|reply
[+] [-] tryitnow|14 years ago|reply
Let's not forget that this entrepreneurial activity is forcing the big guys (Google, FB, etc) to be more innovative than they would otherwise be - either to attract talent or to compete with startups.
[+] [-] tom13311321|14 years ago|reply
The problem isn't overfunding small startups, it's going after markets that are all hype and have little to do with innovation.
Our smartest engineers should be working on ARPA-funded energy projects not how to create a new feature to keep Facebook relevant.
[+] [-] biggitybones|14 years ago|reply
For later round investors it's undoubtedly in their interest to encourage these engineers to join larger firms rather than being on their own. In NYC it's especially competitive given the competition between more mature companies, early stage startups and the money wielding finance industry. The combination could lead to a 'glass ceiling' of sorts for larger companies because of the inability to attract talent; that is, until some of the smaller companies fail and these individual engineers likely end up at a larger spot.
It mirrors the consolidation of an industry. It just takes longer than some investors (like Parker) would prefer, which is the inspiration for statements like this.
[+] [-] mdda|14 years ago|reply
[ And I'm thinking Facebook before people get on my case about financial companies creating value in the real world... ]
[+] [-] jroseattle|14 years ago|reply
The overfunding is mostly a problem for those larger tech companies, not the little guys.
[+] [-] chwahoo|14 years ago|reply
[+] [-] AdamFernandez|14 years ago|reply
[+] [-] sector|14 years ago|reply
Running a small but ambitious company forces a serious, motivated founder to think about every business function. I don't see any meaningful downside for the founders who choose to spend some time on this task, and I see a lot of upside.
Parker's complaints strike me as absurd. If he really believes they can have more impact at FaceBook, he should find a way to create special purpose vehicles within FB that allow founders to get equity in the work of a small team, rather than just getting .00005% of the sum of FaceBook.
[+] [-] chegra84|14 years ago|reply
[+] [-] StuffMaster|14 years ago|reply
Nice analogy. Time to move to Dantooine and work on my X-wing startup.
[+] [-] 9999|14 years ago|reply
[+] [-] mkramlich|14 years ago|reply
2. Dantooine -- this will put a hard, violent limit on the length of your startup's runway, perhaps choose a different location?
[+] [-] lordlicorice|14 years ago|reply
[+] [-] forgottenpaswrd|14 years ago|reply
All good things in life comes from collaboration with others as much as individual contributions, but there is nothing that says that collaboration has to be imposed by a external force, like with a company. The world has ruled before with open collaboration like science, and what we call "open source", "open hardware" today.
BTW, if I could do anything to destroy the vision that all the world is going to be controlled by oligopoly juggernauts and bureaucracies, I will, including creating new companies or helping young people to renew the landscape, as facebook or Google did(when companies success in a free market, next they want to destroy it).
[+] [-] benmathes|14 years ago|reply
[+] [-] kirillzubovsky|14 years ago|reply
- says Sean Parker, the guy who owns between 2 and 7% of Facebook. Well yes, of course.
[+] [-] T_S_|14 years ago|reply
[+] [-] kalvin_ridejoy|14 years ago|reply
[+] [-] earbitscom|14 years ago|reply
[+] [-] georgemcbay|14 years ago|reply
To be clear, I know that Facebook does pay quite well by industry standards (offset somewhat by the bay area cost of living) for top talent, but if this situation is causing them an issue then what they are paying (or offering in general -- money isn't always the only thing) still isn't enough.
[+] [-] nestlequ1k|14 years ago|reply
Maybe they'll get bought via a talent acquisition but as soon as their golden handcuffs are off, they are out doing their own thing again. The reason they allow themselves to get bought via talent acquisition is to be able to easily raise money in the future.
I think Sean Parker is reacting to these types of people. I think the misconception is that the increased funding sources is what is driving these people. I would suggest that they were always there, but 5 years ago they were just living poor and working their ass off to build a startup (usually unsuccessfully).
I do believe I'm part of this group. There's no amount of money that would compel me to take a corporate job. Sometimes money isn't what matters.
[+] [-] jseliger|14 years ago|reply
This is a much bigger problem than many people realize; Ryan Avent discusses it in his ebook The Gated City (http://www.amazon.com/Gated-City-Kindle-Single-ebook/dp/B005...) and on this Econtalk podcast: http://www.econtalk.org/archives/2011/10/avent_on_cities.htm... . Basically, housing costs in Silicon Valley are eating up all the salary increases tech companies are offering. Avent describes how, in the 1990s when the unemployment rate in the Valley was effectively zero and lots of people who'd read "Learn HTML in 24 Hours" were getting jobs, people still weren't flocking to the area because the cost of housing is so high.
Anyone who wants to address extremely high tech salaries needs to be very interested in housing and urban policy.
[+] [-] sliverstorm|14 years ago|reply
Imagine you are a farmer, and the value of grain falls below the cost to produce it. Do you accept what The Market has decided, and continue growing grain for a loss?