Tag Archive for 'money'

Why entrepreneurs need to say “fuck you”

One of the StartupBus teams this year was interviewed by Y-combinator. They were turned down. Why? According to the team, it was because they were not a billion dollar company. This is something I’ve warned StartupBus teams before when they pitch investors so it doesn’t surprise me. But there’s a lesson here that I hope all entrepreneurs understand.

Professional investors are in the game to make money. Their motivation is to generate a multiple on the fund they have raised.

Why is that a problem you may ask?

Well, who cares if a company makes a billion dollars? Apparently from sounding cool that you built something like that up, as a founder, you will be so diluted through multiple rounds of funding that you will probably have a 5- 30% equity stake in the business, depending on how capital intensive the business is and how many co-founders you have.

A VC however, not only makes money on a billion dollar exit, but they get to brag about it to limited partners and to attract new entrepreneurs, which helps them raise new funds and get new deals. The way it works in venture capital is that it is all about the brand and communicating your successes. Any investor that doesn’t admit to not knowing what they are doing are full of shit. Because billion dollar exits come in two forms: entrepreneurs who successfully played a game to  take advantage of the current market (ie, an acquisition today that had it not happened may not have become a sustainable business) or fundamentally disruptive businesses that no one saw coming. I can think of many examples of the above, but I’ll hold back as my knowledge of various companies are not mean to be public  — however, all that matters is the point that billion dollar exits are either due to a confluence of market factors or a fundamentally disruptive business model. You can’t predict for that. Which is why the safest strategy, as an investor, is to back a proven entrepreneur who knows how to make opportunities like that happen.

While investors look for the 15 deals that generates 96% of the returns in a year, let’s bring this back to the entrepreneur only making $300m. Put another way, a billion dollar business is more like a $300m business for you financially speaking (assuming you have 30% of the entity, a best case scenario). But if you are a $300m business pitching a VC, you probably won’t meet the investors cost of capital (ie, their fund is $300m+) and so therefore they don’t get the returns to justify their capital. Putting that into context, a billion dollar startup that a founder has a 30% equity stake in and a $333m startup that a founder has a 90% equity stake in — is, financially speaking, the same. And what I mean by that, is the people who will make that “billion” dollars (the founders) will need to work three times harder for the same return…meaning by raising financing, the market problem that needs to be serviced needs to be three timeS bigger so that people sitting in the backseat (the investors) make just as much money out of it.

Which means absolutely nothing about the problem you are solving in the world. The fact the entire silicon valley ecosystem is influenced by the investor industry, at a time when the costs of doing a startup have dropped dramatically — is a misalignment that will change one day.

If an investor says your business isn’t biggest enough, it means 20% of your hard work isn’t high enough to meet their capital hurdle of providing a certain return to their limited partners which will impact the investors future fundraising. And sadly, this fact is lost on a lot of entrepreneurs who feel they need a sense of validation despite having identified a real market problem. Which ironically, I think is what separates the true disruptive entrepreneurs from the rest. They are the ones that say “fuck you, I’m going to make this work”. And they end up disapproving the assumptions the investors falsely asserted when rejecting the teams’ vision because fundamentally disruptive businesses are never obvious from the outset.

Why do we need money?

Here’s a question for you: if I was to give you money for reading this post, what would you spend it on? $100,000 to be exact. Imagine what you could do with that money? Now hold that thought, because I’m going to ask you again after you walk through this thought experiment.

Our economic system is designed to make us think that making more money is a good thing. Society is measured on GDP which is based on the concept of aggregate demand. What we spend reflects what our demand at all price points are for the good and services in an economy, thereby allowing economists to measure the value of the economy (or better said, to price the value of gross domestic product). So if more aggregate spending makes a bigger GDP, then more personal spending is considered wealth.

And bingo, that’s why we have a materialistic society. But without going into the value judgement of that, let’s dig deeper. Because to spend, it means you need money. Money you generate from an income. (It’s why you want that pay rise.) The more money we can make, the better off we are…we are made to think. Because after all, more money means more spending. And more spending results in a enthusiastic nod from the economists that society has a more valuable economy.

Let’s break this down now: what is money? When it all boils down, money is an agreement in society, to represent value (because money itself has no real intrinsic value outside of the raw materials). Therefore, with money, you can exchange that value with something else of value. Which brings me to the question behind this post: what value does money allow us to purchase?

I mean, buying a car is value — but what are we really buying? It is the convenience enabled by this transportation? It is the dignity generated from being associated with an asset?

What value does money purchase?
As humans, we are governed by two instincts: survival and procreation. If we lived in caves with no food stores, we would spend every waking hour trying to generate sources of food. And because all living beings have a life cycle that eventually ends, we’ve developed an instinct in procreation, which I believe is ‘survival’ in a different sense: of the genes, the kind, the species we are. These two instincts are at the core of value that we purchase with value, but there’s more.

We no longer live in caves. We’ve freed ourselves from this burden of daily food generation to enable our being — which in itself reflects a fundamental concept, which is “time”. Significant, because we remove this burden by purchasing time — we go to restaurants and we purchase tomatoes from the super market, buying outputs from the labour of other people who did what we would have done ourselves (what’s stoping you from growing a tomato in your backyard?). But what’s even more significant, is that as we generate value elsewhere in society so that we can then purchase other people’s time (which we would have otherwise had to do ourselves), we end up having more available time. And humans then ask: what next?

Given we have senses in hearing, touching, seeing, smelling and tasting — by activating our senses, we give a sense of purpose to what we do with our available time. Which is why we seek an ‘experience’. The pursuit of experiences give us, at their base level, a sense of sensory fulfillment.

I believe a final super-category outside of survival, procreation, time and experiences  is power. Because without power, we cannot control our behaviour. We cannot determine how we use our time. Power enables us to shape our environment in a way which further aligns with our goals in survival, procreation, and stimulating our senses. Without power, we can’t use our time. Freedom in my eyes — one of the key dimensions to success in life — is a combination of time and power: the ability to do what you want whenever you want.

Applying those thoughts
You go to the doctor to ensure you are healthy: that’s survival. But you go to the dermatologist to clear that awkward (but harmless) skin imperfection on your face: that’s your desire to remove an impediment to your status in society, which amongst other things, can impact your ability to procreate. You purchase a car so that you can experience more in life, buy time so that you can do more, and give you a rush due to the sensory excitement of driving — but potentially also to have status which will lead to better procreation opportunities.

In my eyes, of all the things I mentioned above, the ultimate of all value is survival and procreation. To say purchasing time is the ultimate, is not true because it’s simply a means to an end. But time, despite this, is probably the most significant of all the factors for what we purchase. If you dedicated you life to one goal, arguably you will be able to get access to that prize. But it could take years, require other people to assist — purchasing access provides value. Think of how advertisers purchase space in publications: they purchase access to an audience that has taken many years to develop by the mast head. (But if the company, like how Apple has, invests in building its own brand and audience — the need to advertise and access those audiences becomes less necessary.)

I mean hey, who needs to purchase more time when you can survive, procreate, and have your senses stimulated with the power to do so as you please? Well, of course we wil always feel like we need more time: because we will never get enough of a good thing. And which is why time dominates our purchasing decisions.

What do we need money for?
Now let’s me ask that question again: if I was to give you $100,000 for the labour you went through to read this post — what would you spend it on? And when you’ve answered that, is money necessary for you to achieve that?

If money is the goal in your life, then maybe you’ve drunk too much cool-aid from the economists who have mistakenly identified the basis of aggregate demand. Which is done on the assumption that humans have unlimited wants and are only limited in achieving them due to scarcity in supply. And short of disputing the fundamental problem in our society, which is based on an inappropriate theoretical understanding of what us human’s desire in life, just remember this one indisputable fact: money purchases value, but money doesn’t create value (in the ultimate sense).

Benjamin Franklin made the observation that time is money, which as a cliche, is to mean your time is valuable like how it is to making money. I wonder though when he said it, he actually called it out for what it really is.