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@eriktorenberg | |||||
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People look at high valuations in early-stage venture and conclude there’s too much capital.
Another explanation for high valuations is we’re suffering a scarcity of (great) founders.
A thread on why we’re suffering from a founder scarcity and some ideas on how to solve it.👇
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Erik Torenberg
@eriktorenberg
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15. sij |
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First off: Why can high prices be partially explained by a scarcity of great founders?
Typically high prices signifies a scarcity of something.
When oil prices are high that means there’s a scarcity for oil.
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Erik Torenberg
@eriktorenberg
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15. sij |
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There’s a saying in commodities that the cure for high prices is…high prices.
Usually, when you raise prices, you get more demand.
Pay engineers more, and you’ll get more engineers.
But with founders that’s not the case. Higher valuations doesn’t mean more founders.
Why?
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Erik Torenberg
@eriktorenberg
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15. sij |
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It's too risky!
The average founder does well, but the median founder flounders.
Which is partially (among other reasons) why so many people take exec jobs or want to be VCs:
Exec jobs will be there. Your startup might not.
VCs have a portfolio, and founders don't.
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Erik Torenberg
@eriktorenberg
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15. sij |
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Indeed: There are lots of VCs who could make great founders, who would actually prefer to build a business than do a financial services job, but they just prefer the economic calculus of venture capital.
Others, to be sure, are unwilling or incapable of building a great biz.
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Erik Torenberg
@eriktorenberg
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15. sij |
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The average founder may have a good outcome, but we need to make the median under have a better outcome.
How? Diversification
VC firms can give upside in portfolio, or VC founders can become scouts, or they should engage in founder pooling activities. (Employees too, ideally)
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Erik Torenberg
@eriktorenberg
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15. sij |
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To be sure, there are many bottlenecks besides risk—perceived career risk, fear of failure, mental health, to name a few—and even within economic risk, founder pooling is just one solution.
Visas, health insurance, cheap housing, child care are others.
twitter.com/eriktorenberg/…
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Erik Torenberg
@eriktorenberg
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15. sij |
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I think we should be doing everything possible we can to unlock more great founders.
How many people are out there who, if they started a company (or a few companies), could create the next $1b company? 100s? 1000s?
VCs far smarter than I disagree here on several grounds
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Erik Torenberg
@eriktorenberg
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15. sij |
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#1 They'd prefer some barriers
They think that "security" is inversely correlated w/ success. There is some truth to this (which is why we don't give big founder salaries)
There is probably a Laffer-esque Curve for security & likelihood of success, but we're not close to it IMO
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Erik Torenberg
@eriktorenberg
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15. sij |
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They think founder diversification will mean less "all-in" from the founders
This thread best demonstrates the sentiment twitter.com/eriktorenberg/…
I'm sympathetic to it, but don't think we're close to the point on this Laffer Curve—we can allow some diversification w/o sacrifice
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Erik Torenberg
@eriktorenberg
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15. sij |
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#2 They don't buy that they're are great founders out there held back. If they need the support/encouragement to start, how will they scale?
I'd equate it to Military: Many great soldiers "stumbled" into war & made it their mission once they got there, but they needed the push
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Erik Torenberg
@eriktorenberg
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15. sij |
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In terms of there incentives, wouldn't you think VCs want more founders?
Maybe not. They’ll only invest in a handful of cos a year, and those cos will hire 1000s of ppl — they want great talent to join them. Their advice is often “join a break out series A or Series B company”
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Erik Torenberg
@eriktorenberg
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15. sij |
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#3 Founder Pooling has never worked. Why would it work now?
Fair enough! I'd suggest it hasn't really been tried. Maybe it won't, but there are other ways to diversify.
E.g. Angel/Scout investing hasn't seemed to hurt founders chances of success (cc @villageglobal)
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Erik Torenberg
@eriktorenberg
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15. sij |
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In conclusion, IMO:
- We're suffering from founder scarcity, partially evidenced by rising valuations
- We should systematically remove bottlenecks to starting cos
- We can incentivize more founders by making median founder outcome closer to avg & by removing economic friction
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Erik Torenberg
@eriktorenberg
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15. sij |
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We also should decrease cultural friction to starting companies:
- celebrate starting cos as a thing for ambitious ppl to do globally
- see startup failures on resumes as badges of honor instead of blemishes
- create communities to find co-founders & founder support(@beondeck)
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Erik Torenberg
@eriktorenberg
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15. sij |
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Would love to hear thoughts & feedback.
h/t @BurakYngn and @david__booth for conversations on the topic.
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